Currency Wars

Currency Wars

From time to time, there are the so-called currency wars on world markets, with which countries try to gain some advantage in the markets and attract new investors.

Below, we will talk about what currency wars are and why they are here in the first place

What are currency wars?

A currency war is considered to be a situation in which, in return for an artificially induced depreciation of the currency of one country, another country responds in the same way. In practice, an example could be if the United Kingdom would devalue the pound, and, the US reacted by devaluation of the dollar, then such a situation can be considered a currency war.

Why do countries go through currency devaluation?

Currency depreciation has several effects. In the short term, devaluation increases the likelihood that the country's economy will grow. Unfortunately, as it happens, there are always two sides of the coin, And this also applies in the case of devaluation – along with the support for the economy of the country, it puts business partners at a disadvantage.

Practical effects of devaluation

Devaluation causes the currency to become relatively cheaper, which is reflected in the export, which also becomes cheaper for other countries. Finally, cheaper export in this case usually means an increase in demand, but in terms of productivity, it usually remains the same. On the other hand, in the case of import, devaluation, in turn, helps to hinder this negative effect, as imported goods become relatively more expensive.

Finally, the biggest plus in currency devaluation is that it usually has a positive effect on the trade and balance of payments, so it is sometimes used to address large macroeconomic deficits.

History of modern currency wars

Events after the First World War are usually mentioned as an example of the first modern currency war when the defeated Germany began to devalue its currency as it wanted to mitigate and in some cases eliminate the negative consequences that resulted from its defeat. Over a short period of time, the United Kingdom and France reacted to Germany's behaviour in the same way, and other countries later joined the same process. It may have seemed then that the constant devaluation of currencies had the "right" effect, but it later led to hyperinflation in Germany, which soon turned out to be devastating.

Another well-known currency war occurred during the time of US President Nixon. At that time, the dollar was devalued to boost employment and economic growth in the United States. This step, on the other hand, increased the likelihood that unemployment would increase in the case of US trading partners (importers of goods), which is why these countries also responded to this by devaluations of their own currencies. In the end, this currency war resulted in considerable speculation of the currencies that had turned, in some parts of the world, into currency crises.

Currency Wars of the “Present”

Some of the world's leading economists believe that economic strategies have seen a significant shift over time, which is also reflected in the functioning of the currency wars, where countries are now trying to make this process look more like political action rather than artificial economic intervention. Related to this is the fact that the time taken by other countries to "return" their devaluation usually increases.

In conclusion - Some selected currency devaluations after 2008

  • Regular depreciation of the Japanese yen to support the domestic economy
  • Regular US devaluation - printing new dollars to protect against adverse effects that may arise from subprime mortgages of 2008
  • 2013 - Devaluation of the Czech crown by the CNB - support for the economy and exports
  • 2015 - Chinese currency depreciation – support for exports
  • 2019 - Further depreciation of the Chinese currency (trade war with the US)

The question remains, will the US devalue the dollar as a countermeasure to Chinese intervention?

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Currency Wars

Team Purple Trading

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