The issue of central banks and/or governments, intentionally manipulating currency markets over the past year, has been a hot topic. The practice of repressing currency rates in order to keep a competitive advantage was typically referred to as a “race to the bottom,” where global economies have been engaged in enormous monetary easing since in order to keep their competitiveness and to try to boost growth. Another term that is sometimes used to define this activity is ‘currency wars’.
We ‘re now in a time, in the last decade or so, after a long period that lasts for decades, where wars are fought using currencies rather than weapons. Countries realize that bringing devastation to other countries by targeting their economies, rather than targeting their armed forces, is easier , cheaper and less violent. That’s why we saw currency wars between the world’s largest economies which are basically a race to maintain their currency as low and as cheap as possible. The countries realize little that even though such wars may be less violent, the effects are as disastrous as conventional wars.
A currency war refers to a situation in which a number of nations are intentionally seeking to depreciate the value of their domestic currencies to stimulate their economies. Even though currency depreciation or devaluation is a normal Fact on the Forex market, the hallmark of a currency war is the large number of nations that may concurrently participate in attempts to devalue their currency at the same time.
The exchange rates decide the currency’s value of one country versus another. In a currency war a nation purposely lowers its value. Countries with fixed exchange rates simply make a notice. Most countries fix it to the US dollar because it is the reserve currency worldwide. Most nations have a flexible foreign exchange rate. They must increase the money supply to lower the currency’s value.
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