The currency war is not a popular term to many people. Every country has its own currencies. The central bank of a country plays a vital role in maintaining a healthy economy of the country. The central bank takes appropriate measures to maintain a competitive advantage in the Forex market thereby ensuring the strength of their currency. But sometimes the central bank weakens the currency value of its currency. The currency war is the process of devaluating its own currency by the central government.
What are the Factors which indicate the Strength of Currency?
- Higher interest rate
- Good economic policy
- Stability of the government
These factors are interlinked because they are compared against other countries. For instance, the interest rate of the US is low but the currency is still strong now because the US interest rate currency as compared to other developed countries such as Switzerland, Japan is still high.
For What Reason would a Country Participate in Money War?
The main reason for conducting a currency war is to boost the exports of the country in the international markets. In simple means, as we know that some countries export the same products, the exchange rate is different for each country. The importer would choose the weakest currency country as an exporter because they can buy the same product at a low rate. The currency war promotes the growth of the country’s local market, which means that the higher rate of export increases the employment opportunities. Country war boosts government to achieve high standards so they can outperform other countries.
Reasons for Currency War
As we have seen above the currency war are not always bad for a countries economy, thus to keep it going, the country regularly monitor the following measures to ensure the value of the currency
- Increased Money Supply;
Government engages in open market operations such as buying bonds from government and private sectors for increasing the money supply.
- Investment in Other Countries
Some countries buy the currencies, cryptocurrencies, or other automated trading robot and assets of other countries. This trend builds an image that a country’s economy is growing faster than their own economy. But actually, they are devaluating their own currency.
- Reducing the Interest Rate
This is the most effective method used in a currency war. By this people take more loans from the banks and other financial institutions this will increase the money supply.
The low-interest rate also promotes funding currency in carry trades. This carry trade sells the currency which reduces the value of the currency. The low-interest rate will reduce foreign investments.
Currency War effects
- Increased inflation
- Importing become expensive
- Unstable market
- Increased economic inequality
- The emergence of black markets