CURRENCY

WAR

DONE BY
KAMALANATHAN.T
 CONTENTS
 OBJECTIVES
 WHAT IS CURRENCY WAR?
 UNDERSTANDING CURRENCY WARS
 ARE WE IN A CURRENCY WAR NOW?
 CURRENCY WAR OR ‘COMPETITIVE
DEVALUATION’?
 WHY DEPRECIATE A CURRENCY?
BEGGER THE NEIGHBOR
THE U.S. DOLLAR’S SURGE
THE U.S.STRONG DOLLAR POLICY
THE PRE-COVID-19 SITUATION
POLICY DIVERGENCE
NEGATIVE EFFECT OF A CURRENCY WAR
THE BOTTOM LINE
WHAT HARM CAN A CURRENCY WAR DO?
WHAT DO COUNTRIES TRY TO ACHIEVE IN A
CURRENCY WAR?
IS INDIA IN A CURRENCY WAR?
NUMBER OF COUNTRIES THAT
IMPLEMENTED DISCRIMINATORY TRSDE
POLICY MEASURES SINCE 2008
 OBJECTIVES

Countries engage in currency wars to gain a

comparative advantage in international trade .
When they devalue their currencies , they
make their exports less expensive in foreign
markets. Business export more , become
more profitable , and create new jobs. As a
result the country benefit from stronger
economic growth.

I took this topic currency war because it will be

interesting about know currency value of
countries and we can know about the
financial sector of those country.
 WHAT IS CURRENCY
WAR
A currency war is an escalation of
currency devaluation policies among
two are more nations , each of which is
trying to stimulate its own economy .
Currency price fluctuate constantly in
the foreign exchange market.
Nations devalue their currencies
primarily to make their own exports
more attractive on the world market.
KEY TAKEAWAYS
• A currency war is a tit-for-tat policy
official currency devaluation aimed at
improving each nation’s foreign trade
competitiveness at the exchange of
other nations .
• A currency war deliberate move to
reduce the purchasing power of a
nation’s own currency
 UNDERSTANDING CURRENCY
WARS
• In a currency war , sometimes referred
to as competitive devaluation , nations ,
devalue their currencies in order to
make their own exports more attractive
in markets abroad . By effective
lowering the cost of their exports , the
country’s products become more
appealing to overseas buyers .
• At the same time , the devaluation
makes import more expensive to the
nation’s own consumers , forcing them
to choose home-grown substitutes.
• This combination of export-led growth
and increases domestic demand usually
contributes to higher employment but
faster economic growth .
• Some monetary policy decisions may
have the effect of currency devaluation .
Reducing interest rates and quantitative
easing(QE) , are both examples.
 ARE WE IN A CURRENCY
WAR NOW?
• In the current era of floating exchange
rate s, currency values are determined
primarily by market forces. However,
currency depreciation can be
engineered by a nation's central bank
through economic policies that have the
effect of reducing the currency's value .
• Reducing interest rates is one tactic.
Another is quantitative easing(QE), in
which a central bank buys large
quantities of bonds or other assets in
the markets.
• The combination of private and public
strategies introduces more complexities
than the currency wars of decades ago
when fixed exchange rates were
prevalent and a nation could devalue its
currency by the simple act of lowering
the “peg" to which its currency was
fixed.
 CURRENCY WAR OR
‘COMPETITIVE
DEVALUATION’?
• “Currency war” is not a term that is
loosely bandied about in the genteel
world of economic and central banking ,
which is why former Brazilian Finance
Minister Guido Mantega stirred up a
hornet’s nest in September 2010 when
he warned that an international
currency war had broken out.2
• In more recent times , national that
adopt a strategy of currency
devaluation have underplayed their
activities , referring to it more mildly as
”competitive devaluation .”
• A currency war is sometimes referred to
by the less-threatening term
“competitive devaluation.”
• In 2019 , the central banks of the U.S.,
the bank of England , and the European
Union were engaged in a “covert
currency war,” according to a report in
CNBC. With interest rates at rock
bottom, currency devaluation was one
of the only weapons the central banks
had left to stimulate their economies.3
 WHY DEPRECIATE A
CURRENCY?
• It may seem counter-intuitive, but a strong
currency is not necessarily in a nation's best
interests.
• A weak domestic currency makes a nation's
exports more competitive in global markets
while simultaneously making imports more
expensive. Higher export volumes spur
economic growth, while pricey imports have
a similar effect because consumers opt for
local alternatives to imported products.
• This improvement in the terms of trade
generally translates into a lower current
account deficit(or a greater current account
surplus), higher employment, and faster
growth in gross domestic product (GDP).
• The stimulative monetary policies that
usually result in a weak currency also have
a positive impact on the nation's capital and
housing markets, which in turn boosts
domestic consumption through the wealth
effect.
 BEGGER THE
NEIGHBOR
• Since it is not too difficult to
pursue growth through currency
depreciation—whether overt or
covert—it should come as no
surprise that if nation A devalues
its currency, nation B will soon
follow suit, followed by nation C,
and so on. This is the essence of
competitive devaluation.
• The phenomenon is also known
as “beggar thy neighbor," which
is not a Shakespearean turn of
phrase but a national monetary
policy of competitive
devaluation pursued to the
detriment of other nations.
 THE U.S
DOLLAER’S SURGE
• When Brazilian minister Mantega
warned back in September 2010 about
a currency war, he was referring to the
growing turmoil in foreign exchange
markets, sparked by new strategies
adopted by several nations.
• Ironically, the U.S. dollar continued to
appreciate against almost all major
currencies from then until early 2020,
with the trade-weighted dollar Index
trading at its highest levels in more than
a decade.
• Then, in early 2020, the coronavirus
pandemic struck. The U.S. dollar fell
from its heady heights and remained
lower. That was just one side effect of
the coronavirus pandemic and the Fed's
actions to increase the money supply in
response to it.56
 THE U.S.STRONG
DOLLAR POLICY
• The U.S. has generally pursued a “strong
dollar" policy for many years with varying
degrees of success. The U.S. economy
withstood the effects of a stronger dollar
without too many problems, although one
notable issue is the damage that a strong
dollar causes to the earnings of American
expatriate workers.
• However, the U.S. situation is unique. It is the
world's largest economy and the U.S. dollar is
the global reserve currency. The strong dollar
increases the attractiveness of the U.S. as a
destination for foreign direct investment(FDI)
and foreign portfolio investment(FPI).
• Not surprisingly, the U.S. is a premier
destination in both categories. The U.S. is
also less reliant on exports than most other
nations for economic growth because of its
giant consumer market, by far the biggest in
the world.
 THE PRE-COVID-19
SITUATION
• The dollar surged in the years before
the COVID-19 pandemic primarily
because the U.S. was the first major
nation to unwind its monetary
stimulus program, after being the first
one out of the gate to introduce QE.
• The long lead-time enabled the U.S.
economy to respond positively to the
Federal Reserve's successive rounds
of QE programs.
• Other global powerhouses like Japan
and the European Union were
relatively late to the QE party.
Canada, Australia, and India, which
had raised interest rates soon after
the end of the Great Recession of
2007-09, had to subsequently ease its
monetary policy because growth
momentum slowed.
 POLICY
DIVERGENCE
• While the U.S. implemented its strong dollar
policy, the rest of the world largely pursued
easier monetary policies. This divergence in
monetary policy is the major reason why the
dollar continued to appreciate across the board.
The situation was exacerbated by a number of
factors:
• Economic growth in most regions was below
historical norms; many experts attributed this
sub-par growth to fallout from the Great
Recession.7
• Most nations exhausted all other options to
stimulate growth, with interest rates at historic
lows. With no further rate cuts possible and
fiscal stimulus not a controversial option,
currency depreciation was the only tool
remaining to boost economic growth.
• Sovereign bond yields for short-term to
medium-term maturities had turned negative
for a number of nations. In this extremely low-
yield environment, U.S. Treasuries attracted a
great deal of interest, leading to more dollar
demand.
 NEGATIVE EFFECTS OF A
CURRENCY WAR
• Currency depreciation is not a panacea for all
economic problems. Brazil is a case in point. The
country's attempts to stave off its economic
problems by devaluing the Brazilian real created
hyperinflation and destroyed the nation's
domestic economy.
• So what are the negative effects of a currency
war? Currency devaluation may lower
productivity in the long term since imports of
capital equipment and machinery become too
expensive for local businesses. If currency
depreciation is not accompanied by genuine
structural reforms, productivity will eventually
suffer.
Among The Hazards:
• The degree of currency depreciation may be
greater than what is desired, which may cause
rising inflation and capital outflow.
• Devaluation may lead to demands for greater
protectionism and the erection of trade barriers,
which would impede global trade.
• Devaluation can increase the currency's volatility
in the markets, which in turn leads to higher
hedging costs for companies and even a decline
in foreign investment.
 THE BOTTOM
LINE
It does not appear that the
world is currently in the grips
of a currency war. Recent
rounds of easy money
policies by numerous
countries represent efforts
to combat the challenges of
a low-growth, deflationary
environment, rather than an
attempt to steal a march on
the competition through
overt or surreptitious
currency depreciation.
 WHAT HARM CAN A
CURRRENCY WAR DO?
• A currency devaluation, deliberate or
not, can damage a nation's economy
by causing inflation. If its imports rise
in price. If it cannot replace those
imports with locally sourced
products, the country's consumers
simply get stuck with the bill for
higher-priced products.
• A currency devaluation becomes a
currency war when other countries
respond with their own devaluations,
or with protectionist policies that
have a similar effect on prices. By
forcing up prices on imports, each
participating country may be
worsening their trade imbalances
instead of improving them.
 DOES CHINESE CURRENCY
AFFECT TRADE WARS?
• It may be the reverse: a trade war damages
the currency of the country it targets.
• The United States has an enormous trade
gap with China. That is, the U.S. imports
more than $271 billion worth of goods from
China and exports nearly $72 billion, as of
June 2022.8
• In 2020, then-President Donald Trump tried
to correct that imbalance by imposing a raft
of tariffs on Chinese goods entering the U.S.
This protectionist policy was aimed at
increasing the prices of Chinese goods and
therefore making them less attractive to U.S.
buyers.
• One effect was an apparent shift in U.S.
manufacturing orders from China to other
Asian nations such as Vietnam. Another
effect was a weakening of the Chinese
currency, the renminbi. Less demand for
Chinese products led to less demand for the
Chinese currency.
WHAT DO COUNTRIES TRY TO
ACHIEVE IN A CURRENCY
WAR?
• A country devalues its currency
in order to decrease its trade
deficit. The goods it exports
become cheaper, so sales rise.
The goods it imports become
more expensive, so their sales
decline in favor of domestic
products. The end result is a
better trade balance.
• The problem is, other nations
may respond by devaluing
their own currencies or
imposing tariffs and other
barriers to trade. The
advantage is lost.
IS INDIA IN A CURRENCY WAR?

• The U.S. Treasury Department placed

India on its watchlist of currency
manipulators in April 2021. It cited
India's outsized purchase of U.S.
dollars as a possible attempt at
currency manipulation.10
• India's rupee hit a record low of 1 U.S.
dollar to 76.68 Indian rupees in April
2020, at the start of the global
economic crisis caused by the COVID-
19 pandemic.11
• The rupee has had a tumultuous
history since its introduction in 1947
when the nation achieved its
independence. The nation moved from
a dollar peg to a floating currency in
1991 and, at the same time, devalued
the currency to about 1 U.S. dollar to
25 rupees.12
• The rupee’s value remained
relatively high through the first
years of its remarkable economic
growth but faltered during the
economic crisis of 2008-2009.13
• As of Feb 5,2022,it remained
relatively low at 1 U.S dollar to
74.64 rupees
• Devalue currency can improve
trade competitiveness and
reduce sovereign debt , but it
can also lead to unintended
consequences.
 AVERAGE MONTHLY CHANGE IN
EXCHANGE RATES OF MAJOR EXPORTING
ECONOMIES

• Though most exchange rates followed a common

path during the crisis, that path entailed more
volatility than in the past few years.6 In 2009,
the volatility of effective exchange rates in 24 of
33 large economies, including the United States,
Japan, China, and the United Kingdom, exceeded
their 2000–2008 averages. The sharpest
increases in volatility occurred among
commodity exporters such as Australia, Canada,
Colombia, and South Africa. Several formerly
planned economies—Russia, Poland, the Czech
Republic, and Hungary—also saw relatively high
exchange rate volatility, reflecting the dramatic
shifts in confidence they experienced.
Remarkably, the euro saw less volatility in
effective terms in 2009 than it had in previous
• At the same time, exchange rate
volatility during this crisis did not
reach the levels that immediately
preceded the collapses of the
Bretton Woods system and the gold
standard (see If It Ain’t Broke, Don’t
Fix It).7 Furthermore, only five of
the 25 major currencies for which
comparable data are available are
seeing bigger real effective
exchange rate shifts than they did
either before the collapse of the
fixed exchange rate in 1973 or
before the concerted interventions
around the Plaza Accord in 1985.
 FINANCIALLY CLOSED DEVELOPING
COUNTRIES

Note: GDP growth and inflation represent annual

2008–2009 average. Export share gain
represents change in share of world exports
from 2007 to 2009. Source: International
Monetary Fund.
• They grew faster, gained more global export
share, and saw moderate, though somewhat
higher, inflation.
• Interestingly, even among this group, the floaters
outperformed the fixers during the crisis—their
average annual GDP was higher and inflation was
lower, though the fixers gained more export
share.
• Among developing countries with open capital
accounts, floaters also outperformed fixers.
Over 2008 and 2009, average annual GDP
growth was nearly 1 percentage point higher in
floaters than in fixers, and floaters gained 0.2
percent of world export share compared to zero
FINANCIALLY INTEGRATES
DEVELOPING COUNTRIES

Note: GDP growth and inflation represent

annual 2008–2009 average. Export share
gain represents change in share of world
exports from 2007 to 2009.
Source: International Monetary Fund.
• These findings suggest that different
exchange-rate regimes helped account for
modest differences in performance during
the crisis. First, developing countries with
closed capital accounts fared somewhat
better, irrespective of currency regime.
• Second, developing countries with flexible
currency regimes performed some what
better than fixers, irrespective of their level
of financial integration. In fact, nearly 20
percent of fixers switched to a float system
between the onset of the crisis and spring
2009, opting for more monetary policy
control when they needed it most.
EXCHANGE RATES AND
PROTECTIONISM
• Exchange-rate reforms have helped
support a more liberal trade regime over
the last several decades. Important shifts
have included widespread currency
convertibility, the move toward unified
exchange rates, and the increased
adoption of flexible exchange rates. The
latter was particularly helpful during the
Great Recession, when countries with
floating currencies appear to have
enacted fewer protectionist measures
than did those with fixed exchange rates,
and several countries switched from a
pegged to a floating regime.
• Nevertheless, certain characteristics of
the international monetary system—and
the ways that countries take advantage
of them—continue to hinder trade.
Countries with pegged exchange rates,
for example, tend to have the most
restrictive trade regimes. Moreover,
those with heavily managed exchange
rates that are also perceived to be
undervalued—beginning with China—
present an obvious source of trade
 NUMBER OF COUNTRIES THAT
IMPLEMENTED DISCRIMINATOR Y
TRADE POLICY MEASURES SINCE 2008

Moreover, though exchange-rate volatility

increased during the crisis, big, new
exchange-rate misalignments were largely
avoided (see Exchange Rates During the
Worst of the Crisis). As a result, countries
may have felt less need to restrict trade.
Flexible currencies also seem to have kept
countries from resorting to competitive
devaluation. According to the Global Trade
Alert, only five countries Nigeria, Vietnam,
Kazakhstan, Venezuela, and Ethiopia, all
relatively small exporters—engaged in
competitive devaluation during the crisis.
• Countries with pegged rates, on the other
hand, tended to resort to trade restrictions
somewhat more frequently (see chart above),
echoing the experience of strict adherents to
the gold standard during the Great
Depression. For example, Ecuador (which
adopted the U.S. dollar as its currency in 2000)
responded to a widening current account
deficit in 2009 by announcing import
restrictions that affected 23 percent of its
imports—far higher than the less than 1
percent of world trade affected by
protectionist measures during the crisis.
• Ecuador is just one example. Countries with
fixed-exchange-rate regimes account for 64
percent of all countries in the world, but they
account for 75 percent of the countries that
have implemented trade discriminatory export
subsidies and 70 percent of those that have
implemented tariff measures since January
2008.