Currency War-Reasons and

repercussions
 What is currency wars ?

• Currency wars, also known as competitive devaluations, is a

condition in international affairs where countries seek to gain a
trade advantage other countries by causing the exchange rate of
their currency to fall in relation to others.
• A currency war refers to a situation where a number of nations
seeks to deliberately depreciate the values their domestic
currency in order to stimulate their economies
It’s a manipulation of currency
 Need for devaluation
• Overvalution of currency associated with import substitution for
industrialization as opposed to export promotion policies.
• The risk of losing competitivemess.
• To relieve an unfavourable balance of trade.
• Economic stabilization.
• Correcting the price distortions.
• To increase competitiveness in foreign market.
• To increase national income per capita.
• Close the development gap.
• Restrictions on commodity as well as capital flows.
The effects of devaluation
• Improve trade balance. ( see fig. 1.1)
• Alleviate balance of payment difficulties.
• Accordingly expand output and employment.
Fig. 1.1
 The impact of currency wars
• A fresh outbreak of ‘currency wars’ will significantly increase
risks for cross-boarder trade and investment.
• The key risks will be associated with certainty over government
policy ,currency volatility and supply change disruption.
• Countries with floating currencies are set to experience better
economic conditions than those with pegged currencies.
• The incidence of trade disputes between countries is set to
rise ,impacting on supply chains.
Key risks of currency war
 Currency wars- is a weaker currency
good or bad ?
• Key points
• Although central banks are using the available tools to fight
deflation, we don’t see this as a ‘currency war’.
• A weaker currency can help an economy to potentially boosting
exports, jobs and inflation, as well as increasing corporate
earnings.
• A strong currency, such as the U. S. Dollars, can cut
international stock returns, so investors may want to rose
Exchange Traded Funds (ETF’s) or mutual funds that hedge
currency exposure.
Why would you want a weaker currency ?

• Export growth –A country’s exports can gain market share as its goods
get cheaper relative to goods priced in stronger currencies. The
resulting increases in sales can boost economic growth and jobs, as
well as increase corporate profits for companies that have business in
foreign market.
• Rising inflation- Inflation can climb when economies import goods
from countries with stronger currencies, since it takes more of a weak
currency to buy the same amount of goods priced in a stronger
currency.
• Relief for debtors – A weak currency can boost inflation, and therefore
income and tax receipts, while the value of debts is unchanged,
making it easier for local currency borrowers to pay down debts.
Is there negative impacts of currency war ?

• Currency devaluation may lower productivity in the long terms,

since imports of capital equipment and machinery become too
expensive for local business. If currency depreciation is not
accompanied by genuine structural reforms, productivity will
actually suffer.
• The degree of currency depreciation may be greater than what is
desired, which may eventually cause rising inflation and capital
flows.
• Competitive devaluations may cause an increase in currency
volatility, which in turn would lead to higher hedging costs for
companies and possibly deter foreign investment.