Participants in Currency War

Topic: Currency War

Title: Participants in Currency War

1. Introduction

        Currency wars, the allegedly beggar-thy-neighbor policies undertaken by central banks of dispirited economies, are broadly structures for deteriorating the world’s economic problems in both the 1930s and today, (Eichengreen, 2013). Currency war is also known as competitive devaluation which considered a “beggar-thy-neighbor” type of monetary policy, as it amounts to a nation trying to increase an economic advantage without consideration for the ill-effect it may have on other countries. Besides, people refer “currency war” as one that is being called a “lose-lose” and a “global race to the bottom” and it is a state of international affairs in which countries compete to devalue their currencies among each other. Theoretically, the devaluation of currency can help the particular countries to have a cheaper export than others and gain advantages in international trade. By the means of greater exports, it subsequently increases the employment rate of the country as the companies have to employ more workers when the demand increases as well as improves the economic growth rate. There are several methods to devalue the currency including direct intervention, interest rates, quantitative easing, and threats of devaluation. Direct intervention is the direct way to devalue the currency by selling its own currency and buy other foreign currencies. When the country decreases its interest rates, it may cause currency devaluation and make it cheaper to borrow against others. Quantitative easing means the country uses its own currency to buy its own sovereign debt in order to depreciate its currency. Besides, currency can be devalued through economic policy, for example implementing quantitative easing (money printing). When the exchange rates fall, export price falls, and import price rises, which boost the domestic manufacturing and employment but hurts consumers’ purchasing power. Global trade can also suffer. Currency wars are probably one of the greatest risks posed to the wealth of nations today. (Bruegel & Ferry, 2010)

        The problem of “currency war” emerged as both a major concern and a source of confusion in early 2013, (Eichengreen, 2013). According to the data in Quéréa, Gourinchasb, Martinc & Plantind (2014), the term ‘currency war’ is used to refer to a situation in which countries or monetary zones attempt to weaken their currency in order to win market shares from other countries or economic zones. This concomitant longing is arithmetically impossible to achieve since all exchange rates cannot depreciate simultaneously. Besides, exchange rates are important in the international economy, because they affect price of all country’s exports and imports, as well as the value of all overseas investment. (Nelson, 2013).