A currency war is a situation whereby two or more nations aggressively reduce the exchange rate of their currency. This can be executed by printing money to buy the currency of other nations. The following are illustrative examples.
Class PoliticsA low currency can be good for the young and the working class as it may stimulate exports and provide jobs. It can be bad for the old and the rich as it can cause inflation and a decline in the value of savings.A low currency is good for export industries such as manufacturing or farming. In some cases, a government has close ties to firms that directly benefit from a low exchange rate and are influenced by such firms to drive a currency lower.
Currency wars tend to occur in times of financial stress such as a depression, recession or financial panic. Governments may lower currency in an attempt to stimulate growth. The rational economic policy of one nation may be viewed as a currency war by other nations. For example, it may be logical for a nation to lower interest rates in response to a recession to stimulate risk taking. This can produce a significantly lower currency as a side effect as investors withdraw due to the low interest rates.
A nation that has an unsustainable debt may create money and keep interest rates low simply to make debt payments. This can result in severe inflation and a tumbling currency.
NotesGenerally speaking, policies directed at weakening a currency are associated with poor governance. While it may benefit exports it has a large number of side effects such as destroying savings and boosting the cost of imports. A high currency requires a nation to advance in areas such as technology and quality and is good for the long term competitiveness of a nation.Next: Trade War
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