TRT World - World in Focus: Fears of 'Currency War' Reignited

FEARS OF 'CURRENCY WAR' REIGNITED The global economy is still recovering from the 2008 financial crisis. Leading economies are actually slowing down. And last week, China shocked investors around the world by devaluing its currency. It’s decision confirmed that world’s second largest economy is not doing well. So in order to boost exports, China devalued the yuan three times. It was biggest devaluation in more than 20 years, raising fears of what’s called a “currency war”. Exports can have a major impact on economic growth. And a lower currency makes exporting goods and services cheaper, leading to more sales (video 4/00.17-00.34). So countries sometimes compete by devaluing their currencies against one another. That sort of competitive devaluation can lead to a so-called currency war. The term was first coined by Brazil’s former finance minister Guido Mantega in 2010. COMPETING CURRENCIES IN FINANCIAL BATTLEFIELD So back then the central banks in Japan, South Korea and Taiwan devalued their currencies. China was also making efforts to keep the yuan from appreciating. And both the US and the eurozone had their own policies that only made the problem worse. Japan had been stuck with deflation for years, and heated up the “currency war” in 2013. The Bank of Japan launched a $1.4 trillion stimulus package and injected a further $726 billion in October 2014. Referred as “Abenomics”, Japan’s policies successfully undervalued the yen. There is an ongoing currency war in the eurozone. Unlike member states with weaker economies , Germany demands a stronger currency. But for countries in debt, a weaker euro means that they can export more. Today, thanks to the European Central Bank’s so-called quantitative easing the euro has been weakening. And the U.S. dollar is expected to rise further with the expectation that the Federal Reserve will hike interest rates. CRITICISM OF CURRENCY DEVALUATION Improving economic growth in one country at the expense of growth in others best describes a currency war. The prominent political economist Adam Smith called such monetary policies “beggar-thy-neighbour”. When one currency falls, another rises. And if all countries devalue their currencies, most economists would agree that no one wins. Facebook: https://www.facebook.com/trtworld Twitter: https://twitter.com/trtworld

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