Expect boost for global currency war, resurgent yen and euro may force policy makers to step in

A flare-up in the global currency war is looming, as a resurgent yen and euro threaten to give policy makers in Japan and Europe an incentive to add monetary stimulus.

Japan’s currency advanced versus the dollar for the third time in four weeks, while the euro climbed versus most of its peers. Hedge funds lifted bets on yen strength to the highest in more than three years, and pared wagers against the European common currency.

The greenback suffered as sentiment cooled for further currency-supportive interest-rate increases in the US amid sustained market volatility and weakerthan-forecast domestic economic data.

A growing divergence in US growth and monetary policy versus the rest of the world has stalled amid signs the American economy can’t wholly escape a slowdown in China and a patchy recovery elsewhere. That’s weighing on the dollar, while stymieing the economic goals of the Bank of Japan and Europe Central Bank, which benefit when their currencies depreciate. Further monetary easing is on the cards if the yen strengthens beyond 115 per dollar and the euro gains toward $1.15.