“They will have no choice but to keep intervening,” said Irene Cheung, a currency strategist in Singapore at Australia & New Zealand Banking Group. “The Hong Kong dollar’s strength reflects the capital flows we see into most Asian currencies.”

Policy makers from around the world have bemoaned the economic threat of stronger exchange rates as asset purchases by the Federal Reserve boost the supply of dollars. At International Monetary Fund meetings in Tokyo this month, Philippine central bank Governor Amando Tetangco said the Fed was causing “challenges to monetary policy in emerging markets.”
I wrote about this last week:

What this boils down to is the doctrine of US credit money as the engine of global growth. The corollary or collateral damage of such a doctrine is that secondary producer or material economies need to accept the inflationary cost of “stimulating” US debt for consumers. If the Fed fails to get banks to lend money to US households, then there are no customers for the emerging market economies, according to Bernanke, so it all fails anyway.

There is a high degree of plausibility to that doctrine; up to a point. A healthy US consumer is undoubtedly a primary driver of global economic activity. The questions remain as to what constitutes healthy consumers and how to achieve them.

http://www.realclearmarkets.com/articles/2012/10/19/the_fed_falls_to_inconsistent_and_contradictory_depths_99943.html

Bernanke has made it plain, in more than just his Tokyo speech last week, that ONLY the US$ is allowed to devalue.  He called out other central banks for NOT letting their currencies rise.  As the Hong Kong episode makes plain, this is not just idle jawing back and forth.  The HK$ has been pegged continuously since about 1984.  Destabilizing currency regimes (even if they are wrongly instituted or badly calibrated) is a dangerous game.  The HK$ has seen two runs on the peg in the week since Bernanke spoke.

What is indicated here is how far Bernanke and the FOMC are committed to orthodox economics, so much so that they are willing to risk roiling currency markets (which are much more than speculative financial instruments, having much to do with the real economy and global trade) to chase down some monetary “leakage” into growing US consumer debt.

Given the renewed interest in Swiss francs and the Swiss bonds (reached back below -20bp today on the 2-year) this might not be the best backdrop.  My knee-jerk reaction to QE 3 (5) was that the Fed panicked.  I think this is another piece of evidence for that – that Bernanke is even willing to ignite a currency war in the vain hope that MBS will turn into REO-to-rental jobs.  That seems to be a low probability to succeed, high downside effort that is more consistent with a last-ditch than a careful and measured programmed or scripted response.

As Joe rightfully stresses, inflation is currency debasement.  To what ends will “mainstream” economists go to achieve it?  I don’t see how currency destabilization is conducive to economic growth, particularly since real economy agents are desperate for nothing more than real stability.  Institute a stable financial and trade system and see what happens to global growth.