Column-Upside down world of ‘reverse currency wars’ is real :Mike

By Mike Dolan

LONDON (Reuters) – An upside down world of “reverse currency wars” is seeping into the real one.

Devotees of Netflix (NASDAQ:) hit “Stranger Things” know well how mayhem and monsters from the show’s foreboding parallel universe seep into regular daily life, with devastating effect.

Something similar appears to be happening to one of the dominant economic policy tropes of the past decade.

Financial firms, such as Goldman Sachs (NYSE:), have for months warned that long-fought “currency wars” – where countries struggle to prevent a weakening U.S. dollar and overvalued domestic currencies from crimping exports – could be inverted, with scary consequences.

Dubbing this twilight policy zone “Reverse Currency Wars”, they reckon the re-emergence of inflation, a hawkish Fed and dollar strength would force governments and central banks to rethink exchange rate orientation and race to keep pace.

In the decade after the U.S. Federal Reserve first embarked on bond-buying quantitative easing to ward off deflation, many countries complained the resulting dollar weakness would hurt their trade in a low-growth world and force them to overheat by trying to match the Fed’s easy money.

But all that changed after this year’s aggressive Fed turn toward reining in 40-year high inflation with sharply higher interest rates, a halt to new asset purchases and planned rundown of its bloated balance sheet of more than $8 trillion.

The upshot has been a rocketing dollar that’s seen its index against other major currencies soar almost 20% over the past year – leaving U.S. trading partners with the opposite problem of trying to support rather than cap currencies for fear of their weakness would make dollar-priced energy and food imports even costlier, aggravating sky-high inflation everywhere.

Over the past week, ‘reverse currency wars’ became more of a reality.

The about-turn was clearest in the Swiss National Bank’s shock interest rate rise on Thursday, a seeming shift in its overarching policy of suppressing the Swiss franc to fend off deflation toward embracing its strength as a tool to cool imported inflation. Given its standing policy led to it accumulating more than $1 trillion in foreign currency reserves in the process, the change is potentially seismic.

“The move confirms our bullish view on the franc and is the strongest evidence yet of our ‘Reverse Currency Wars’ thesis — the era of targeting weaker exchange rates is over,” Goldman’s currency team told clients, adding that analysis showed a 1% franc rise cut 0.1/0.2 points from inflation and saying the SNB would likely seek a 5% rise in the franc’s real exchange rate.

Graphic: Dollar’s percentage gains over past year – https://fingfx.thomsonreuters.com/gfx/mkt/gkplgelmevb/One.PNG

Graphic: G4…