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What is Currency War?
Written by: PaxForex analytics dept - Thursday, 25 February 2016 0 comments
Currency war, also known as competitive devaluation, is a condition in international affairs where countries compete against each other to achieve a relatively low exchange rate for their own currency. As the price to buy a country's currency falls so too does the price of exports, and Imports to the country become more expensive. So domestic industry, and thus employment, receives a boost in demand from both domestic and foreign markets.
Competitive devaluation has been rare through most of history as countries have generally preferred to maintain a high value for their currency. Countries have generally allowed market forces to work, or have participated in systems of managed exchanges rates. An exception occurred when currency war broke out in the 1930s. As countries abandoned the Gold Standard during the Great Depression, they used currency devaluations to stimulate their economies.
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.
According to Guido Mantega, former Brazilian Minister for Finance, a global currency war broke out in 2010. This view was echoed by numerous other government officials and financial journalists from around the world. Other senior policy makers and journalists suggested the phrase "currency war" overstated the extent of hostility. With a few exceptions, such as Mantega, even commentators who agreed there had been a currency war in 2010 generally concluded that it had fizzled out by mid-2011.
An individual currency devaluation has to involve a corresponding rise in value for at least one other currency. The corresponding rise will generally be spread across all other currencies. In normal times other countries are often content to accept a small rise in the value of their own currency or at worst be indifferent to it. However, if much of the world is suffering from a recession, from low growth or are pursuing strategies which depend on a favorable balance of payments, then nations can begin competing with each other to devalue.