As countries around the world work to fight inflation, central banks have a limited number of options to cool their economies. When countries raise interest rates, and their currencies get stronger, they may begin to engage in a competition with other countries, in what is known as a "reverse currency war," or "competitive appreciation."
Ford School professor Kathryn Dominguez noted that some countries might feel that as the U.S. Fed raises interest rates, attracting international investors to the dollar, smaller countries see their currencies devalue. "From an emerging markets perspective that could lead them to make allegations of a reverse currency war, because their view might be that the policies being put in place by countries like the United States are now putting them at a disadvantage," she said.
