It was the moment Glenn Stevens has been dreading for months.

The much anticipated decision overnight by the European Central Bank to push interest rates into negative territory has seen global investors pile into the Australian dollar.

With the promise of even more radical action by the ECB down the track, any hope Stevens harboured for a lower Aussie dollar has been dashed.

At the very least, Australian interest rates will remain at record lows for quite some time. In fact, the possibility for further cuts has just lifted.

In October last year, the Reserve Bank of Australia's governor went on the offensive, arguing the currency was overvalued, would fall "materially" in the future and had risen from levels that already were "unusually high".

Back then it was around 95 US cents. The jawboning worked for a while, with the local dollar dropping below 87 US cents in February this year. Today, however, it stands above 93 cents, even after prices for our mineral exports have plummeted.

Coal prices have been in a funk for a year-and-a-half. But now iron ore - our biggest export earner - is in trouble, with prices now established well below $US100 a tonne, around half their boom time peak, and threatening to drop below $US90.

In a rational world, that should see the Australian dollar trading around 80 US cents, perhaps even lower. At such levels, our service and manufacturing industries would be allowed to breathe easier rather than gasping for oxygen as they are now.

Next round of currency wars?

Europe's central bank chief Mario Draghi may have had little option. But in trying to kickstart the moribund economies on the eurozone's periphery, he has unleashed a new round of the global currency wars.

As a small nation in relatively good financial shape, Australia will again become collateral damage in a grinding war that shows no sign of ending.

The US has been on the financial equivalent of methamphetamine ever since the financial meltdown in 2008, essentially printing money through a process known as quantitative easing.

This has been a deliberate bid to force interest rates to almost zero and to depress the greenback and thereby improve its global competitiveness. Japan now has embarked upon the same course.

While Europe so far has avoided money printing – mostly because of objections from Germany – it clearly is headed in that direction.

The noise around Europe's debt crisis may have abated. But problems merely have manifested themselves in other ways, most notably in sluggish economic growth through much of the eurozone that has seen inflation fall below 1 per cent raising the spectre of a Japanese style deflation that has crippled Asia's one-time economic powerhouse.

Europe has cut its official rate to just 0.15 per cent, and banks considering parking their money with the central bank now will have to pay for the privilege. Until last night, they earned no interest on deposits with the ECB. Now they will pay 0.1 per cent.

If this fails to breathe life back into the European economies, Draghi will unleash the main artillery in a few months. That will involve a form of quantitative easing.

America and Japan could then be forced to retaliate.

With the official cash rate now at 2.5 per cent, and with a AAA credit rating, investors will once again pour cash into Australia, pushing our currency higher or at the very least keeping it steady.

Having abandoned attempts to talk the dollar down, the only weapon at Glenn Stevens' disposal is the interest rate, a weapon he is loath to employ given the potential for inflation problems down the track.