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Currency Wars Explained

Currency wars are also referred to as competitive devaluation, and refers to a method a country uses in international affairs to achieve a relatively low exchange rate in favour of their own currency. Historically, competitive devaluation has been rare, as most countries want to keep a high exchange rate for their currency.

Currency Wars and Competitive Devaluation Explained

Why do countries want a lower exchange rate?

Usually, you would think devaluing a currency would be a bad thing that countries want to avoid. However, the international economic crisis and created unusual trends throughout the economy; by devaluing their own currency, it becomes cheaper to buy that countries currency (as the exchange rate is lower) and, therefore, cheaper to buy products from that country. Foreigners will be more interested in buying products from a country that is unselling other competitor countries, and in turn the country who is attempting to devalue their currency will see a dramatic increase in exports, which could potentially lead to more national profit, available jobs and a boost in economic growth.

How does a country devalue its currency?

There are a number of methods a country will use to devalue its currency in currency wars. Some include:

  • Cutting interest rates, making it less attractive for people to save their money with low interest rates.
  • Increasing the supply/printing of money, as more money in circulation decreases its value.
  • Intervention buying, or buying assests of another country and increasing theircurrency, thus devlauing your own.

Why can currency wars be bad?

When one country devalues its currency its competitors will be too expensive and foreign countries will by products from the lowest resources. So, in turn, other countries will try to devalue their own currency, to also gain more customers and export more. If you imagine a global trend of devaluing currency in an attempt to gain an advantage, this results in very unstable international economy.

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Who started the currency war?

There are a few debates into who started the "currency wars" global trend. Many economic experts suggest China has deliberately keeping its currency devalued for years, hence its exceptionally large trade surplus. However, China has recently bought US assets, in a bid to keep the US dollar artifically high after these accusations.

Others suggest that the US Treasury's tendancy to increase how much currency is in circulation and increase liquidity around the world is the main cause of these currency wars.

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