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Currency War Secrets And How It Affect Us

Have you heard about what is currency war? Do you know what currency war is all about?

Learn what is currency war all about and how it can affect us.

A currency war is also known by the less threatening term “competitive devaluation.” In the current era of floating exchange rates, where currency values are determined by market forces, currency depreciation is usually engineered by a nation’s central bank through economic policies that may force the currency lower, such as reducing interest rates or increasingly, “quantitative easing (QE).” This introduces more complexities than the currency wars of decades ago, when fixed exchange rates were more prevalent and a nation could devalue its currency by the simple expedient of lowering the “peg” to which its currency was fixed.

“Currency war” is not a term that is loosely bandied about in the genteel world of economics and central banking, which is why former Brazilian Finance Minister Guido Mantega stirred such a hornet’s nest in September 2010 when he warned that an international currency war had broken out. But with more than 20 countries having reduced interest rates or implemented measures to ease monetary policy from January to April 2015, the trillion-dollar question is – are we already in the midst of a currency war?

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, and simultaneously makes imports more expensive. Higher export volumes spur economic growth, while pricey imports also 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 GDP growth. 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.

Currency depreciation is not the panacea for all economic problems. Brazil is a case in point. The Brazilian real has plunged 48% since 2011, but the steep currency devaluation has been unable to offset other problems such as plunging crude oil and commodity prices, and a widening corruption scandal. As a result, the Brazilian economy is forecast by the IMF to contract 1% in 2015, after barely growing in 2014. read more at investopedia.com

 

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