HONG KONG: A full-blown currency war where major central banks and governments, including the U.S., deliberately weaken their currencies can no longer be ruled out, Pacific Investment Management Co.’s global economic adviser Joachim Fels wrote in a report.

The view is in line with a rising chorus of Wall Street analysts who warn that President Donald Trump’s repeated complaints about the foreign exchange practices of key trading partners heightens the risk of U.S. intervention to weaken the dollar.

Fels describes current conditions as a "cold currency war, round three” that is at risk of escalating.

"Following a pause since early 2018, the cold currency war that has been waging between the world’s major trading blocs for more than five years has been flaring up again,” Fels wrote. 

"Moreover, even an escalation to a full-blown currency war with direct intervention by the U.S. and other major governments/central banks to weaken their currencies, while not a near-term probability, can no longer be ruled out.”

Trump’s calls for the Federal Reserve to cut interest rates as well as signals from the European Central Bank, People’s Bank of China and the Bank of Japan that hint at further easing measures has inflamed global currency tensions, Fels wrote.

"The curtain has opened for round three of the cold currency war,” he said.

While near-term intervention by the U.S. government to weaken the dollar remains unlikely -- given unresolved questions like whether the Treasury has adequate firepower -- the greenback can still be weakened by policy signals.

"Even the threat of outright dollar sales, coupled with continued verbal and tweeted "weak dollar policy” interventions and, importantly, easier monetary policy by the Fed, could well do the trick,” according to Fels.

The U.S. last intervened in foreign-exchange markets in 2011 when it stepped in along with international peers after the yen soared in the wake of that year’s devastating earthquake in Japan.

Major central banks may not be the only ones in the cold currency war, according to Fels, who noted expectations for lower rates in South Korea, Indonesia, Chile and South Africa this week.

"While I’ve focused on the cold currency war among major central banks in this note, many other central banks are of course also engaged in it,” Fels wrote. - Bloomberg