Currency war is a condition in international affairs, where countries seek to gain an advantage over other countries by causing the exchange rate of their currency to fall about other countries. It is an escalation of currency devaluation policies among countries, each trying to stimulate their economies. When the exchange rate of a country falls, the export rate becomes more competitive in other countries and the import rate becomes more expensive. A currency war is also known as competitive devaluation.
The competition in export rates and increase in import rates benefit the domestic industry of the country and hence increase the employment as well. But the price increase for imported goods is rather unpopular because it harms the citizen’s purchasing power, and if all the countries started adopting this same strategy of competition in export and import rates then there will be a decline in international trade, which will harm each country adopting this strategy. Currency war is the manipulation of currency.
Now, competitive devaluation does not seem like a wise choice, because why would a country itself will reduce currency value? But the first currency war broke out in the 1930s during The Great Depression when countries abandoned gold standards, that is, when a standard economic unit of account is based on a fixed quality of gold, and used currency devaluation instead to stimulate economies. Countries engage in currency wars to build their dominance over international trade.
The term ‘Currency war’-
The term currency war was first coined in 2010, by the Brazilian Finance Minister, Guido Mantega, and at the same time claimed that all the huge countries are at currency war with each other, which is hurting the national economies of small, under-developed, or developing countries like his own-Brazil.
Consequences of Currency war-
- Political Uncertainty: Countries try to avoid recession and for that, they adopt policies that can boost their exports. This creates political uncertainty because adopting policies in haste and boosting exports have crucial impacts.
- Currency Uncertainty: Boosting exports with the adoption of new policies will keep currencies weak.
- Disruption to Supply Chains: Having weak currencies will lead to extra cautiousness and increased protectionism for currencies like Brazil, Thailand, and Indonesia have capital controls.
- Trading Disputes: With currency war, countries have increased trading disputes, which threaten the smooth operations and functioning of supply chains.
Devaluation-
Devaluation is officially lowering a country’s currency value within a fixed-exchange-rate system. The monetary authority of the country sets a lower exchange rate for the national currency in comparison to foreign reference currency or the currency basket. Countries devaluate their currencies due to trade imbalance, by doing so they can reduce the cost of the export and manage to maintain their place in global competition.
Effects of Devaluation of currency-
- Exports are less expensive to foreign customers.
- Imports are more expensive.
- Inflation.
- Growth and Demand for exports.
- A decline in local consumer purchasing power.
- Less competitive and less efficient domestic companies.
- Shrink trade deficits.
- Reduce the interest rates on government debts.
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