Currency War and Repercussions

A deeper insight of currency war could be given along with its far reaching consequences on the world economy.

Currency war between countries is a condition where they compete to attain the lowest possible exchange rate for their respective currencies. It is the most immediate consequence of war or of political upheavals. The US Dollar has been the leading currency for long. But the current international scenario is drastically changing. Many leading banks, especially in developed economies, have reduced their interest rates and this has altered the currency market. While the currency falls, so does the price of exports from the country. Imports become more expensive thus increasing demand of domestic products. This boosts the local industries and employment. Conversely, this also affects people’s purchasing power.

This recent phenomenon has compelled the countries to perform a competitive devaluation of their currency and to manage their exchange rates. This consequently creates a many-side battle of countries against the Dollar, but the sluggish growth of the global economy seems to be doing nobody good, except for China, which has emerged as the world’s second largest economy. Because Yuan doesn’t trade freely, the Chinese government has sold zillions of Yuan to keep the prices low. This tremendous advantage that China has in terms of exporting helps them produce cheap merchandize which has demands all over the world.

What the world’s leading banks have to do is to come together and coordinate currency management efforts and impose stricter policies on China. This however has been quite difficult because China is big on most economies’ investments and government bonds. China has insured itself to a much more than adequate extent. Diplomatic intervention by groups like the G20 or attempts to cajole China into being an importer can benefit both its people and the world.