The matter of central banks and/or governments, purposely manipulating currency markets has been a hot topic over the last year. The practice of suppressing currency rates to maintain a competitive advantage has commonly been referred to as a “race to the bottom”, where global economies have been engaged in huge monetary easing since in order to maintain their competitiveness and attempt to boost growth. Another phrase often used to describe this practice is “currency wars”.
After a long period that last for decades, we are now in a time, over the last decade or so, where wars are fought using currencies rather than using weapons. Countries realize that it is easier, cheaper and less violent to bring destruction to other countries by targeting their economies rather than targeting their military. This is why we have been seeing currency wars between the major economies of the world which is essentially a race to keep their currency as low and as cheap as possible. Little do the countries realize that though such wars might be less violent, the effects are as devastating as conventional wars.
A currency war refers to a situation where a number of nations seek to deliberately depreciate the value of their domestic currencies in order to stimulate their economies. Although currency depreciation or devaluation is a common occurrence in the foreign exchange market, the hallmark of a currency war is the significant number of nations that may be simultaneously engaged in attempts to devalue their currency at the same time.
Exchange rates determine the value of one country's currency versus another. A country in a currency war deliberately lowers that value. Countries with fixed exchange rates just make an announcement. Most countries fix them to the U.S. dollar because it is the global reserve currency. Most countries are on a flexible exchange rate. They must increase the money supply to lower the currency's value.
Currency wars threat global economy and political stability. With the arising power of nationalism across the world, first in the US and as we can estimate other countries will join the latest phenomenon, currency manipulation would be a major field that every person must follow. As the value of the dollar declines relative to other currencies, the prices of imports will rise. We have already seen an increase in food and oil prices. It also lowers the price of U.S. exports, which helps economic growth.