The document discusses the concept of currency wars, where countries compete to lower the value of their currencies to boost exports. It provides background on past currency wars and reasons they occur, such as trade disputes and volatility. Specific examples discussed include China selling US treasuries, Brazil launching an offensive to suppress gains in its currency, and the introduction of the Euro challenging the US dollar's dominance. The effects of currency devaluation like improving trade balances are also summarized.

1. Presented By:
Nadeem Khan
Namrata Kumari
Manish Singh
Mateen Ahmed
Meghna
Mohit Thaparia
Possible Emergence of new currency
Manjari Manisha

2. • „Currency wars‟ :The manipulation of currencies to boost exports.
• Currency war, also known as competitive devaluation, is a condition
in international affairs where countries compete against each other to achieve a
relatively low exchange rate for their own currency.
• “Currency war” - term first introduced by Guido Mantega, the finance minister
of Brazil.
• A lower value for the home currency will raise the price for imports while
making exports cheaper.
• It significantly increase risks for cross-border trade and investment

3. Currency war in global economy:
• „Currency wars‟ (the manipulation of currencies) have
been associated with downturns in the global economy as
governments attempt to boost their ailing economies
through export growth.
• Such manipulations require that currencies are kept weak
in order to make exports competitive on the global stage.
• The risks associated with currency war is, uncertainty
over government policy, currency volatility and supply
chain disruption.

4. Reasons for currency wars:
• Trade disputes between countries: Disputes in this
context arise over trade „dumping‟ (flooding a
domestic market with goods or services to force
domestic producers out of the market to give the
exporting country a monopoly) and countervailing
duties ( Ex: Country A imposing increased tariffs on
goods from Country B if it believes Country B is
subsiding its exports).

5. Contd…
• Currency Volatility: The sharpest volatility was in countries that
were highly reliant on commodity exports: this was primarily
down to the significant shifts in global commodity prices .
• Trade Protectionism: National policies could offset global
attempts to encourage trade.
• Global financial institutions such as the IMF, World Bank and
WTO are attempting to encourage trade.

6. • The first currency war started in the 1930s during the Great
Depression when countries dropped the gold standard, which
resulted in a loss of intrinsic value and therefore devaluation of
the currencies as nothing backed the paper money in circulation.
• When one country devalues its currency it gains a short term
advantage until the neighboring countries follow suit.
• Once competing countries have devalued there is no more
advantage and the price to pay is that international trade
suffers, which in the end impacts all countries negatively.

7. • The currency wars of the 1930s ended with the Tripartite
Agreement in September 1936, countries agreed to sell gold to
each other in the seller‟s currencies at an agreed fixed price,
which helped to stabilize exchange rates .
• During the years until 1971 under the Bretton Woods
agreement, countries did not have the option to engage in
currency wars; even after the gold standard was abolished
countries had little incentive to engage in competitive
devaluation since no synchronized effort among nations
existed.

8. • The recent financial meltdown of 2008 caused the re-emergence of
currency wars as countries look for ways to improve their financial
positions by reducing large current account deficits.
• Developed countries chose export strategies through competitive
devaluation.
• Reported in March 2012, Japan‟s current account and trade deficit
hit a record high in January, even though a weak Yen has been seen
as “growth hormone” for the export driven economy, it is now
backfiring due to Japan‟s reliance on importing fuel for energy
production since the Fukushima accident a year ago .

9. • Even Australia, which has been doing very well due to continued
exports of coal and iron to China, recorded its first trade deficit in
eleven month in January and an 8% drop in exports, the largest
drop in the past three years.
• The Australian dollar had appreciated 4% against the US dollar
this year so far .
• Brazil reported a current account deficit of $7.1 billion in January
2012, the largest deficit on record and the real has appreciated
9.3% against the US dollar this year, more than any other currency
.

10. since June 2011 China has been selling US Treasuries from a high of $1.315 trillion
in July 2011 to $1.152 trillion by the end of December 2011, a reduction of $163
billion.

11. “China, the world‟s second-largest crude consumer, finished filling the first phase
of its emergency stockpile with 103.2 million barrels of oil in 2009. The second
phase, comprising eight locations with a storage capacity of 168.6 million
barrels, is scheduled to be completed by early 2013. The Lanzhou depot has a
capacity of 18.9 million barrels”.

12. Brazil launches fresh „currency war‟ offensive
• Brazil will no longer “play the fool” and let its currency
appreciate while richer nations gain economic advantage
by devaluing theirs, its finance minister Guido Mantega,
said this week.
• On the contrary, Brazil has embarked on a new offensive
to suppress gains in the real. On Monday it extended a tax
on foreign loans for the second time this month.

13. Currency Wars chronology
• 1947(when India became member of IMF): rupee tied to pound.
• 18 sept,1949: pound devalued; india maintained par with pound
• 6 june, 1966: rupee devalued, Rs 4.76=1$, after devaluation, Rs
7.50=1$
• 1971-1979: rupee is overvalued due to india‟s policy of import
substitution.

14. Contd…
• 23 June, 1972: UK floats pound, india maintains fixed exchange rate
with pound.
• 1975: india links rupee with basket of currencies of major trading
partners. Although the basket is periodically altered, the link is
maintained until the 1991 devaluation.
• July 1991: rupee devalued by 18-19%
• March 1993: inified exchange rate:1$=31.37
• 1993/1994: rupee is made freely convertible for trading, but not for
investment purpose.

15. Need for devaluation
• Overvaluation of currency associated with import substitution for
industrialization as opposed to export promotion policies.
• The risk of losing competitiveness.
• To relieve an unfavorable balance of trade.
• Economic stabilization.
• Correcting the price distortions.
• To increase competitiveness in foreign market.
• To raise national income per capita
• Close the development gap.
• Restriction on commodity as well as capital flows.

16. The effect of devaluation
• Improve trade balance
• Alleviate balance of payment difficulties.
• Accordingly expand output and employment.

17. • Each currency linked by a rate of exchange to each of the other
currencies in the world
• We may also compute the “average” rate of a currency with the
currencies of trading partners. This is the effective exchange rate.
• A currency is also an asset, a way to store wealth. The value of a
currency tomorrow is not the same as the value of that currency
tomorrow set as of today
• The spot rate between two currencies is not the same as their
forward rate.
• And the rate at which two currencies are exchanged is not the same
as the exchange rate that measures the purchasing power of a given
currency in terms of goods in the domestic country and in a foreign
country

18. In a world without uncertainty, investors face two exchange rates:
>Spot market: price for immediate delivery of one currency for another
>Forward market: exchange rate fixed today for future delivery of currency
• External trade balance = exports – imports
• With trade balance<0, demand for foreign currency
(necessary to import) higher than supply (obtained
from exporting).
• Result: exchange rate depreciates and, doing so,
makes exports less expensive and imports more
expensive

19. • The introduction of the Euro was defined as “the most important development in
the evolution of the international monetary system.
• The euro is the second largest reserve currency as well as the second most traded
currency in the world after the United States dollar.
• It is the second-most traded currency on the forex market, as many institutions
and individuals trade the EUR.
• Many experts considered the Euro a possible rival for the Dollar and a threat for
its predominance as an international currency.
• The reasons why the introduction of the Euro :
• The USA has been and is still being affected by international debt and deficit
problems, which turned the USA from the world biggest creditor to the world‟s
biggest debtor.
• In 2003 the US current account deficit reached $550 billion, or about 5 percent
of GDP”.

20. • US and Europe are finding economic growth difficult to achieve because of
a lack of domestic demand: consumers and businesses are not spending,
choosing instead to reduce their debt levels and/or increase their savings.
• One way in which governments can attempt to drive economic growth is by
adopting policies that increase their country‟s exports. Politicians have a
number of options for doing this, but a favoured choice is to depreciate the
local currency, so that a country‟s goods/services become relatively cheaper
on the global stage.
• A weak currency also increases the cost of imports, thus making domestic
producers more competitive in the national economy, again driving growth.
However, there are problems with maintaining a consistently under-valued
currency, not least of which is that it encourages inflation, which is itself
detrimental to driving growth.