If you’ve been watching currency exchange rates and yields, you can’t help but notice that world currencies seem locked in a a race to the bottom.

Central banks are slashing interest rates as if they were kudzu. The yen has yielded almost nothing since the 1990s. Then the Feds determined to punish savers for their foresight, thrift and prudence by making dollars yield absolutely nothing. The Brits have followed suit, and even the stodgy folks at the European Central Bank are slashing and burning their interest rates.

Looks like their concerns about inflation have been wrong all along.

Today, the Swiss central bank cut its interest rate close to zero and started buying up foreign currencies to keep the Franken from appreciating too much as deflation looms.

They bought euros and dollars. The Swiss currency dropped as much as 3.2% after the decision. That may sound like nothing to stock investors inured to 5%, 6%, 10% drops by now. But in view of currencies, such rapid devaluation is HUGE.

What does this mean?

The players of the global economy compete mainly on two levels: Cheap labor and cheap currencies. Just as a $8-a-week worker tightening bolts on an assembly line in China is more attractive to manufacturers than a $14-an-hour laborer doing the same job in Jersey, export goods priced in a currency of relatively lesser value are more attractive to international buyers than those that include an exchange-rate premium.

The major players in the global economy understand that… China, Europe, Japan. In times of crisis, they’re letting their currencies become cheaper, slash taxes on exports, and ease labor restrictions.

Unfortunately, the U.S. government still thinks the mechanics of the global economy don’t apply to the new order. Timothy Geithnert opined in January that “a strong dollar is in the interest of the United States” when he won the Senate Finance Committee’s backing to head the U.S. Treasury.

With the competitors out of the gate, we sure hope that the Obama Administration will finish re-arranging the patio furniture before the lights go out…

Source: Currencies: Race to the bottom