Major Currency Clashes

A currency clash is often a tit -for- tat policy. In this situation, two or more countries make attempts to deliberately devalue their currencies via economic policies to invigorate their economies against the others. It is often referred to as ‘competitive devaluation’. 

The devaluation of the currency may lead to several outcomes favourable for the country. It can make their exports more appealing to the foreign markets. At the same time, it makes imports quite expensive, prompting people to go for homegrown brands, leading to faster economic growth. 

However, currency devaluation may also lead to several undesirable consequences. It might be possible that some of the industries of the country are dependent on imported goods for manufacturing. Since imports become expensive, inflation might also increase unfavourably. This is one of the many unintended consequences of currency devaluation.

Currency wars are not held in great esteem by economists, who deem them responsible for hindering global economic stability.

Currency Exchange Rates

The value of a country’s currency is decided by the currency exchange rates. These rates are determined by the foreign exchange traders. There are two kinds of exchange rates:

• Flexible Exchange Rates- Most currency values are determined by the foreign exchange market, which sets the currency value. The traders in this market, buy and sell foreign currencies at flexible rates. Most of the countries do not directly intervene in the exchange rate for their currencies although their economic policies might affect the exchange rates in the long run.

• Fixed Exchange Rate- A few exchange rates for the currencies for some countries never or rarely change. This is because the central banks of these countries formulate their policies in a way that keep the exchange rates for their currencies fixed. Their central banks have enough foreign reserves with them to do so.

Appreciation and Revaluation of the Currency

In appreciation of the currency, the market forces of demand and supply influence the values of the currency exchange rate. If the demand for a currency goes up in the international market, the currency appreciates.

Currency revaluation is an act done by the official reserve bank of the country wherein the officials deliberately increase the currency exchange rate of the country.

Depreciation and Devaluation of the Currency

Depreciation of a currency is a process heavily influenced by the market forces of demand and supply. When the demand for a currency falls in the international market due to several intricate factors like high inflation rates, current account deficits, the exchange rate for that currency falls. 

A currency devaluation is an official act done by the official reserve bank of the country to deliberately depreciate the value of a currency and set up a new exchange rate.

Currency Converter

The currency converter is an application of the exchange rates determined by the market which gives an approximate amount of the currency required for an exchange to the foreign currency.

For example, at the time of writing the article, the prevailing exchange rate between INR and USD was 1 USD = 76.30 INR.

When talking about Dubai Currency (United Arab Emirates Dirham), the prevailing exchange rate is 1 UAE Dirham = 20.77 INR.

Causes of Currency Wars

A currency war involves two or more nations deliberately formulating economic policies that will devaluate their currencies. This sometimes helps in faster economic growth. There are several reasons as to why the countries devaluate their currencies:

1. Boost Exports- In a competitive world, exports are encouraged while imports are discouraged. Devaluing the country’s currency makes the country’s exports less expensive and the foreign companies get allured towards them as a result. It also makes the imported goods expensive, discouraging people from them and prompting them to look for home alternatives. 
2. To Decrease Trade Deficits- Countries also devaluate their currency to decrease their trade deficits with other countries. This is because the devaluation of currency increases exports and reduces imports.
3. To Reduce Sovereign Debts(National Debts)- Devaluing currency can also make the outstanding sovereign debts less expensive to pay as the currency devaluates over time.

Effects of a Currency War

A currency war may have the following effects:

• It might lead to undesirable inflation.
• It might boost the economic growth of the country due to increased exports and relatively low imports.
• It might reduce the cost of interest payments for outstanding sovereign debts for the involved countries.
• However, it might also backfire and become the cause of reduced economic growth.
• The “beggar thy neighbour” phenomenon states that if a country follows the policy of deliberate currency devaluation, it won’t be long until another nation joins the list, followed by several other countries. This could lead to unintended consequences.
• It might also lead to increased volatility of the country’s currency in the exchange rate. 
• If the increased import expenditure is covered for by locally manufactured products, the country’s economy surges. However, it has the reverse effect when the local products cannot cover up for imported goods.

Countries Known to have been Involved

Historically, currency devaluation has often been used as a tool to promote economic growth in favourable environments. 

The term ‘currency war’ was coined by the Brazillian finance minister Guido Mantega, when he accused many countries of deliberately devaluing their currencies. The central banks of Japan, South Korea, Taiwan and England had encouraged currency devaluation. The Swiss were also following suit. Mantega had feared that such policies will tarnish the economic growths of countries majorly dependent on exports (like Brazil). 

In the late nineteenth century, countries like Germany, Japan, USA and Argentina had used the policy of currency devaluation. However, from all of the above, the dollar of the US has still managed to remain a strong currency.  Argentina, on the other hand, faced an economic crisis in the 1990s when it tried to appreciate its currency. Even today, China keeps the value of the Yuan, relatively down, compared to other currencies. 

Conclusion

The exchange rate system for trade in international currencies is very volatile and often leads to a currency clash between two countries. The reserve banks of the countries deliberately devaluate the value of one’s currency which invites a competitive devaluation leading to a currency clash between two nations.