[quote=flu]The news keeps talking about the potential of a currency war. What exactly is it? Do each country to to print more money and try to make their currency worth less to the other peers?…How does this work in the longer term?[/quote]
A couple of general things.
1) The world really hasn’t experienced a true currency war since the 1930’s during the great depression.
2) Everyone cannot devalue against everyone else. For every nation that gets more competitive with lower exchange rates another must get less competitive. Countries would likely use tariffs and other trade protection mechanisms to combat this.
3) In general to lower your exchange rate you are willing to sell your currency in exchange for foreign currency or assets. Now granted other countries central banks can attempt to do this as well so if you want to fix an exchange rate you’d have to be willing to effectively sell unlimited amounts of your currency. For example the Swiss central bank tried to do this last year and gave up after about 6 months.
All in all it’s bad for the economy because businesses no longer have confidence to order and produce goods because they might get hammered by a currency devaluation. If you are going to be invested in a company during a currency war you’d definitely want to be invested in something that’s entirely dependent on domestic goods and services. Multinationals will likely suffer.