The dollar this week touched its lowest level for 2010. That little Singapore’s adoption of a higher trading band helped trigger the sell-off adds to the talk of its demise. The expectation of more quantitative easing at home is certainly not helping the U.S. currency. But the relative rise of Asian currencies is a good thing. Global rebalancing has been called for: this is it.

Asian currencies need to revalue. Many economies are growing fast, with exports a key driver. The countries run trade surpluses and also attract large capital flows. Their response has been to try to prevent currency appreciation. That means soaring foreign exchange reserves, excess money growth — and the risk of inflation and asset bubbles.

Sound monetary policy it might be said, begins at home. The prime goal of the Federal Reserve is to nurture a sound U.S. economy. But it would be naive to ignore the fact that Fed policy also drives markets around the globe. And at present the Fed risks blowing global bubbles, with potentially damaging effects.

The bubble blowing begins with beliefs about the Fed’s thinking. In the past few weeks the understanding has become that the Fed favours a second round of quantitative easing. The impacts have been many: a sharp fall in the dollar against the euro, yen and many emerging market currencies, appreciating bonds and equities in the developed world and emerging markets, a new record gold price, and a jump in global commodity prices to two year highs.

Tensions over the cheap yuan are running high amid Chinese Prime Minister Wen Jiabao’s visit to New York. Japan’s deliberate weakening of the yen further aggravates China. The irony is that America, too, might be said to be pursuing a weak currency policy. And there are other, quieter, victims in the currency wars.

Currency strains are proliferating because global growth is scarce. The United States is not recovering fast. Many American businesses and politicians accuse China of taking away American jobs. A congressional committee may vote for trade sanctions on China on Friday. Quarrels could get nasty and lead to reprisals.

Currency interventions are generally seen as unwise props for weakness or beggar-my-neighbour treatments for strength. But Japan’s first intervention in six years to weaken the yen is more about tackling persistent deflation and stagnation in the world’s third biggest economy and is therefore welcome.

The move came the day after premier Naoto Kan survived a leadership challenge. The ministry of finance sold yen and bought dollars to weaken Japan’s currency. But Kan’s government also appears to be shoving the sluggish Bank of Japan towards action. Tadao Noda, a BoJ board member, intimated in a meeting with businessmen that the bank was unlikely to “sterilise” the finance ministry’s yen sales — mopping it up with issuance of short-term bills — but would let the move add liquidity. Noda also talked of decisive policy measures to combat deflation. This may reflect new-found urgency within the BoJ to address the threat.

We may not be in such a bad hole here but if we are, we can get out of it. That is likely to be the message from Ben Bernanke, the U.S. Federal Reserve chairman, to bankers and policymakers at their annual powwow in comfortable Jackson Hole on Friday.

Bernanke’s keynote address comes at a moment of overriding fear for the U.S. and global economy. U.S. housing data this week were awful. Last week’s weekly jobless claims figure was alarming, though this week’s was marginally less so. Durable goods orders, excluding transportation, suffered their biggest fall in July for 18 months. To the markets, all of this is suggestive of the dreaded double dip.

By Ian Campbell

–  The author is a Reuters Breakingviews columnist. The opinions expressed are their own –

Just in government and David Cameron’s relationships are in question. Eyebrows have been raised about the prime minister’s friendship with an Old Lady, sometimes known as the Bank of England. The affection appears reciprocated by Mervyn King, the Bank’s governor. But to think the Old Lady’s independence is compromised is probably to take things too far. The bank’s current low interest rate policy looks more than just a political favour.