Battle of the Currencies

Battle of the Currencies

Battle of the Currencies

Although it may sound a bit strange, some countries are deliberately devaluing their currencies. This kind of intervention is mainly used during times of recession in order to bring a competitive edge through lower priced goods and services to boost economic activity. The counter reaction to currency devaluation by one country generally initiates other countries to follow that path in order to maintain advantages. This situation is called “Currency Wars”. 

When the economy is expanding, countries often prefer to keep their currencies strong so that their citizens will be able to purchase more, and by doing so, decrease any threat of inflation.

So, if a strong currency causes citizens to buy more and keeps inflation away, what are a weak currency's benefits? Well, when a country keeps its currency low it can affect the levels of export by lowering the price of goods and services to a more attractive level. That is why people buy low priced products from China, because China keeps its currency valuation relatively low. This is actually a very smart move as they can sell more goods at a very attractive price to other countries, which means more jobs and a greater economic growth. 

This situation may sound idyllic but there are a lot of problems that can happen as a result from these currency wars.  When many countries are in this “war” and everyone is trying to devaluate their currencies at the same time, it can potentially cause market instability. This situation is extremely unhealthy for the market as it can deter people from investing and trading. That, in turn, can interfere with the market growth negatively rather than the anticipated positive outcome. 

 

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