The term ‘currency war’ has been mentioned quite a lot in the media, but what exactly is it? A currency war is also known as competitive devaluation and is a condition in international affairs that sees countries compete against each other to achieve a lower exchange rate for their own currency.
As the price to buy a currency falls so too does the real price of exports from the country. This gives the country the advantage of boosting domestic industry and has the potential to increase jobs. However, it comes at a price. As exports fall the cost of imports rise and often has the negative impact of reducing citizens purchasing power. Like in a conventional war this action is often met with retaliation from other nations.
A good example of this from recent times is the argument that occurred between the United States and China. The global economic crisis has also resulted in several other countries’ taking steps that could potentially lead to a large scale currency conflict. Only this month the Japanese have begun action to deliberately reduce the value of the Yen, it remains to be seen if any other nations will retaliate with its own measures.
Devaluation can make interest payments on international debt more expensive if those debts are denominated in a foreign currency, and it can discourage foreign investors. At least until the 21st century, a strong currency was commonly seen as a mark of prestige while devaluation was associated with weak governments.
The common outcome of currency war is a weakening in international trade and protests from foreign powers or the nation in questions own citizens. The pieces are in place for a widespread currency war to occur as they often occur during times of economic hardship such as the continuing 2009 economic downturn.