By Hao Li: Subscribe to Hao's RSS feed
December 1, 2010 10:05 PM EST
In the global "currency war," the Bank of Japan intervened in the currency market, the Federal Reserve conducted a second round of quantitative easing (QE2), and China continued to suppress the value of the yuan.
Although the European Central Bank (ECB) may appear to be the only innocent party, it's possible that France and Germany, the two leading countries of the euro zone, actually engineered a competitive currency devaluation of their own.
In late October, Germany and France announced they wanted the private sector to share the cost of future bailouts. Basically, they were asking holders of bonds issued by the peripheral euro zone nations to take on more losses in the future.
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This spooked investors because many of them had bought peripheral European debt not based on the underlying country's ability to pay, but on the assumption of financial backing from French and German taxpayers.
Since the announcement, the European sovereign debt crisis came back in full force, Ireland was forced to take a bailout, and Portugal is eyed as the next victim.
And whether or not this was Germany's and France's intention, the euro halted its rally and began falling against the U.S. dollar and Chinese yuan.
Many experts, including ECB President Jean-Claude Trichet, were critical of Germany's and France's controversial suggestion and warned it would cause a sell-off in peripheral European bonds, trigger a crisis, and thus become a self-fulfilling prophecy.
Experts are also puzzling over their motives.
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