It doesn’t matter what market you work in currency, cryptocurrency or commodity your income is determined by what we used to call fiat money dollars, euros, etc. It is very important to understand what their value depends on in the last chapter we talked about public debt pressure US to dollar. Now we will talk about the relationship between the value of different currencies and why states are interested in a weak currency.
Currency wars are the actions of the central banks of several countries, which are aimed at weakening the national currency and achieving such a low rate at which exports become more profitable than imports. The term "Currency war" came into use in 2010, after a historic statement by Brazilian Finance Minister Guido Mantega, in which he accused leading Western economies of unleashing "hostilities" against the Brazilian real. In those days, this currency was able to strengthen against a basket of major currencies by 30% during the year. Despite the brightness of the wording, the name “Currency War” is considered by many politicians and journalists to be a carrier of an aggressive semantic connotation; therefore, it is often replaced by the economic term “competitive devaluation”, which, in essence, this process is.
What happens during the currency war
The decrease in the value of the national currency can be achieved by artificial inflation, for example, by increasing the money supply or by lowering the refinancing rate. After that, the cost of exported goods decreases, and this in turn leads to an increase in their volume. At the same time, the cost of imported goods produced abroad increases and it becomes profitable for consumers to buy domestic goods. The growth of demand is followed by the development and growth of domestic industry, and then the employment of the country's population.
History of Currency Wars
Artificial competitive devaluation used to be usually rare, since mainly countries tried to have a high exchange rate of the national currency. The first such situation happened long before the origin of the term during the Great Depression of the 1930s. The dollar was devalued against the dollar, a printing press was turned on. The depreciation of the US currency against gold was stopped by 1934. As a result, the US dollar lost 41% of its initial value, but this supported the economy and helped out of the crisis.
After the Second World War, in accordance with the Bretton Woods agreement, the exchange rates of many countries became fixed against the dollar, which in turn was provided with gold at a fixed price of $ 35 per ounce. Of course, this could not last forever. In the 1970s, this system collapsed, and the courses were sent to free swimming. Central banks began to resort to various methods of changing the exchange rate: foreign exchange interventions, changes in key rates, revision of reserve forms, thereby regulating the economy and supporting national production. All this led, in the end, to the problem with the Brazilian real and the emergence of the term “Currency Wars” in 2010.
Recently, a particularly common method of turning on the printing press and increasing the money supply. This is usually due to specious intentions. Such an excuse in recent years is the quantitative easing (QE), which was launched by America after the 2008 mortgage financial crisis. This helped the country to some extent cope with the consequences of the collapse of the system. The main peak of this process was in 2012-2014. But after another years, the refinancing rate was kept at a level close to zero.
In the wake of America and other central banks of the world's leading economies, printing presses were included. They simply had no choice, since there was a risk of a decrease in demand for the products of enterprises working for export, and as a result a decrease in GDP. A quantitative easing program has been launched in the Eurozone, the UK, Japan and other advanced economies. Thus, the majority of developed countries were involved in the world currency war, which began to pursue competitive devaluation policies.
Only at the end of 2016 were the plans of the Federal Reserve System announced for a significant tightening of monetary policy, and the rate began to increase. This was due to a significant improvement in macroeconomic indicators for rising inflation and lower unemployment.
Beginning of the end of worldwide quantitative easing
The ECB Forum in Portugal became an important stage in the soft course race for the leading economies of the world. The head of the European Central Bank, Mario Draghi, was the first to make it clear on June 27, 2017, after his words there was a sharp increase in the European currency, which was already at high levels.
This impulse was followed by further strengthening of the Euro and the pair EUR / USD reached 1.145 in a couple of sessions. The day after this speech, the head of the Bank of England, Carney, announced the reduction of incentives and tightening monetary policy. Then the Bank of Canada was added to them. Of the leading economies, only Japan at that time refrained from such statements.
Such a wave of changes was associated not only with a real improvement in the economies of the countries, but also as a response to visible US steps to reduce incentives and raise the key rate.
USA and China
In the modern world, a striking episode in the history of the Currency Wars is the collision of the United States and China. This confrontation can be distinguished due to the passions between two large trading partners. For many years, America has been complaining about dishonesty and the greatly undervalued exchange rate of the Chinese currency, the renminbi. The history of this conflict has its roots since 2005, when the Chinese currency ceased to have a fixed rate.
The turnover between China and America was constantly increasing and as a result reached record heights, reaching the first place, and overtook Canada.
America benefits from a high yuan to lower purchasing prices in dollars. Therefore, it constantly puts pressure on China, accusing it of currency wars, while using the media to draw attention to this conflict. At the same time, China, not paying much attention to Washington, continues to follow its own goals in decision-making in the policy of monetary regulation. So in 2017, US President Donald Trump announced from all the stands about possible sanctions against the Middle Kingdom, but after his first meeting with Secretary General Xi Jinping, he changed his intention. China is increasingly strengthening its position, and now it is the largest counterparty not only to the United States, but also to almost hundreds of other countries.
The positive and negative sides of currency wars
With the depreciation of the national currency, the value of exports falls, which increases its volume and this ultimately leads to an increase in employment. Domestic industry is developing, there is a flow of investments in it.
On the other hand, devaluation leads to an increase in prices for imported goods, which reduces the purchasing power of the population. Inflation is increasing, which with uncontrolled growth can lead to a serious crisis. Also, competitive devaluation, which occurs simultaneously in countries and partners in international trade, can lead to lower turnover and the destruction of contractual relations between entrepreneurs of these states.