Johannesburg - An escalating currency war could make exchange rates highly volatile, sparking protectionism and reducing global trade flows, associate economist at Moody's Analytics Mekael Teshome said on Friday.
The consequences of the outbreak of a global currency war would leave South Africa bruised economically, he added.
Group of 20 finance ministers and central bank governors are meeting in South Korea this weekend, where currency matters are expected to dominate the agenda.
According to Teshome, South Africa risked becoming a casualty, with few good unilateral options for coping with competitive devaluations if a currency war broke out.
The strength of emerging market currencies has become the topic for debate around the world, as authorities try to weaken the units that are believed to be damaging trade competitiveness.
"South Africa is no exception; the rand's strength is arguably preventing a stronger economic recovery," Teshome said.
South African authorities have tried to accumulate more international reserves, a measure which has not managed to weaken the rand.
Teshome suggested another measure, which the SA Reserve Bank (Sarb) is not likely to adhere to easily.
Global teamwork is key "The Sarb would thus have to cut its benchmark rate, now at 6%, by a considerable amount to bring down demand for the rand," he said.
The bank could also attempt to implement controls on capital inflows to deal with rand appreciation, Teshome said.
However, he warned that the effectiveness of capital inflow taxes was debatable, as they can deter much-needed foreign investment.
On a trade-weighted basis, the rand's real effective exchange rate is said to have risen by about 30% since the start of 2009.
"For now, South Africa's best hopes lies in a multilateral effort to achieve currency stability," Teshome said.
Finance Minister Pravin Gordhan noted this week that a coordinated effort was needed to tackle strong currencies, as opposed to individual countries each adopting different measures to address the problem.
The stronger currencies in emerging markets are happening on the back of strong capital inflows into their economies, which still offer higher yields compared with assets in developed nations where interest rates are very low.
Teshome, however, fears that the rush of capital inflows into emerging markets could inflate asset price bubbles and "painful busts" when developed market assets start to look attractive again, although this may only happen a few years later.