A currency war, or competitive devaluation, occurs when countries lower their currency values to gain trade advantages, leading to increased exports but higher import costs and inflation. The consequences include potential economic destabilization, trade disputes, and self-defeating inflation, as all countries involved may suffer from retaliatory measures and protectionism. Understanding the motivations, impacts, and historical context of currency wars can provide insights into current global economic dynamics.

1. CURRENCY WAR

2. INDEX
1. CURRENCY WAR
2. KEY TAKEAWAYS
3. UNDERSTNDING ABOUT CURRENCY WAR
4. IMPLICATIONS
5. NEGATIVE EFFECT
6. MOTIVATIONS BEHIND CURRENCY WAR
7. CHALLENGES AND RISKS
8. HOW DOES CURRENCY WAR START?
9. WHAT HARM CAN A CURRENCY WAR DO?
10. IMPACT OF CURRENCY WAR
11. IMPACT OF CURRENCY WAR ON INDIA
12. ACHIEVEMENT IN CURRENCY WAR
13. HOW DO CURRENCY WAR END?
14. HOW TO TRADE CURRENCY WAR?
15. HISTORY OF CURRENCY WAR

3. INDEX
16. COMPARISON BETWEEN 1932 & 21st CENTURY CURRENCY WAR
17. CURRENCY WAR VS COMPETITIVE DEVALUATION
18. THE BOTTOM LINE
19. ARE WE IN CURRENCY WAR?
20. GLOBAL PERSPECTIVES
21. EXAMPLES OF CURRENCY WAR
22. CONCLUSION
23. MY VIEW ON CURRENCY WAR
24. BIBLIOGRAPHY

4. WHAT IS CURRENCY WAR ?
Currency war also known as Competitive Devaluations , is a condition in International Affairs
where countries seek to gain a trade advantage over other countries by causing the exchange
rate of their currency to fall in relation to other currencies. As the exchange rate of a
country’s falls, exports become more competitive in other countries, and imports into the
country become more and more expensive. Both effects benefit the domestic industry, and
thus employment, which receives a boost in demand from both domestic and foreign
markets. However the price increases for import goods (as well as in the cost of foreign
travel) are unpopular as they harm citizens’ purchasing power ; and when all countries
adopt a similar strategy, it can lead to a general decline in international trade, harming all
countries.
A currency war is an escalation of currency devaluation policies among two or more

5. nations, each of which is trying to stimulate its own economy. Currency prices fluctuate constantly in
the foreign exchange market. However, a currency war is marked by a number of nations simultaneously
engaged in policy decisions aimed at devaluing their own currencies. A currency war is an escalation of
currency devaluation policies among two or more nations, each of which is trying to stimulate its own
economy. However, a currency war is marked by a number of nations simultaneously engaged in policy
decisions aimed at devaluing their own currencies.
Nations devalue their currencies primarily to make their own exports more attractive on the world
market.
KEY TAKEAWAYS :
• A currency war is a tit-for-tat policy of official currency devaluation aimed at improving each nation's
foreign trade competitiveness at the expense of other nations.
• A currency devaluation is a deliberate move to reduce the purchasing power of a nation's own

6. currency.
• Countries may pursue such a strategy to gain a competitive edge in global trade and reduce their
sovereign debt burden.
• Devaluation can have unintended consequences that are self-defeating; the worst of these is
inflation.
• During a currency war, a nation's consumers also bear the burden of higher prices on imports.
UNERSTANDING CURRENCY WARS:
By effectively lowering the cost of their exports, the country's products become more
appealing to overseas buyers. This is sometimes referred to as competitive devaluation.

7. At the same time, such devaluation makes imports more expensive to the nation's own consumers,
forcing them to choose home-grown substitutes.
This combination of export-led growth and increased domestic demand usually contributes to higher
employment and faster economic growth.
However, it may also lower a nation's productivity. The nation's businesses may rely on imported
equipment and machinery to expand their production. If their own currency is devalued, those imports
may become prohibitively expensive.
Economists view currency wars as harmful to the global economy because these back-and-forth actions
by nations seeking a competitive advantage could have unforeseen adverse consequences, such as
increased protectionism and trade barriers. United Nations Conference on Trade and Development.
"Trade Wars: The Pain and the Gain."

8. What's the currency war about?
Over the past decade, the world has been divided into "deficit" countries and
"surplus" countries.
Deficit countries, like the US and the UK, borrow from the rest of the world, so they can import more
than they export.
Surplus countries, like China, Japan and many other Asian countries, do the opposite. They lend to
other countries to help finance their exports.
The euro zone has typically imported about as much as it exported, staying in balance.
But within the euro zone there are also big imbalances: Germany runs a big surplus, while Spain,
Greece and others run deficits.

9. Key Characteristics:
1. Central Bank Interventions:
Central banks play a crucial role in currency wars by implementing policies to weaken their
currencies. This may involve adopting expansionary monetary policies, such as lowering interest
rates or engaging in quantitative easing.
2. Exchange Rate Manipulation:
Countries with fixed exchange rates, like China, may intentionally keep their currency values low
to maintain a competitive edge in global trade.
3. Global Economic Impact:
Currency wars can have wide-ranging effects on the global economy. While individual countries

10. may benefit in the short term by boosting exports, the overall impact can lead to increased
economic instability.
Implications of a currency war :
• Trade Disputes :Currency wars can escalate into trade disputes as countries accuse
each other of unfair trade practices, leading to retaliatory tariffs and barriers.
• Economic Instability : Competitive devaluations can lead to heightened volatility
in financial markets, affecting investor confidence and leading to economic instability.
• Inflation/Deflation : Currency devaluations can spur inflation in importing
countries and deflation in exporting countries, affecting price levels domestically and
internationally.
• Global Economic Slowdown : Currency wars can contribute to a slowdown in

11. • Geopolitical Tensions :Currency wars can exacerbate geopolitical tensions as
countries seek to protect their economic interests and assert dominance in global financial
markets.
POSITIVE IMPLICATIONS :
• COMPETITIVE DEVALUATION :
When a country tries to devalue its currency to increase its international competitiveness.
• ECONOMIC GROWTH :
If the Dollars become weaker, exports become cheaper leading to an increase in demand for US
exports. This can help to increase Aggregate Demand (AD) and improve the rate of economic growth.
This may be important, because problems in the US housing market are threatening the rate of

12. rise in exports could help to boost economic growth and prevent any move towards a recession.
• BALANCE OF PAYMENTS :
The US has a large current account deficit (7% of GDP) therefore a devaluation will help to improve
and reduce the current account deficit. However, a devaluation alone is unlikely to solve the
problem.
• INFLATION :
A devaluation may lead to increased inflationary pressure for 3 reasons :
1. Increase in exports causes rising AD and therefore could lead to demand pull inflation.
2. It is argued a devaluation reduces the incentive, for manufactures and exporters, to cut costs
and become more efficient.

13. Negative Effects of a Currency War
Currency depreciation is not a panacea for all economic problems. Brazil is a case in point. The
country's attempts to stave off its economic problems by devaluing the Brazilian real created
hyperinflation and destroyed the nation's domestic economy.
So what are the negative effects of a currency war? Currency devaluation may lower productivity in the
long term since imports of capital equipment and machinery become too expensive for local
businesses. If currency depreciation is not accompanied by genuine structural reforms, productivity
will eventually suffer.
Among the hazards:
•The degree of currency depreciation may be greater than what is desired, which may cause rising
inflation and capital outflows.
•Devaluation may lead to demands for greater protectionism and the erection of trade barriers, which
would impede global trade.

14. •Devaluation can increase the currency's volatility in the markets, which in turn leads to higher
hedging costs for companies and even a decline in foreign investment.
Motivations Behind Currency Wars:
• Export Competitiveness:
Weaker currencies make a country’s exports more attractive in international markets, potentially
boosting sales and supporting domestic industries.
• Economic Stimulus:
Devaluing a currency can be seen as a tool to stimulate economic activity, particularly during
periods of economic downturn or recession.
• Trade Imbalances:
Countries facing trade deficits may resort to currency devaluation as a strategy to rebalance trade
by making exports more competitive.

15. • Global Demand:
Countries may seek to increase global demand for their goods and services by making them more
affordable through a cheaper currency.
Challenges and Risks:
• Import Costs:
Currency devaluation can lead to increased costs for imports, potentially contributing to inflation.
• Domestic Economic Challenges:
Import-dependent countries may face challenges such as higher inflation, reduced growth, and
potential job losses.
• Financial Sector Stability:
Currency wars can pose risks to the financial sector, with the potential for increased non-
performing assets (NPAs) and destabilization.

16. How Does Currency War Start?
In the current era of floating exchange rates, currency values are determined primarily by market
forces. However, currency depreciation can be engineered by a nation's central bank through
economic policies that have the effect of reducing the currency's value.
Reducing interest rates is one tactic. Another is Quantitative Easing (QE), in which a central bank buys
large quantities of bonds or other assets in the markets. These actions are not as overt as currency
devaluation but the effects may be the same.
The combination of private and public strategies introduces more complexities than the currency wars
of decades ago when fixed exchange rates were prevalent and a nation could devalue its currency by
the simple act of lowering the "peg" to which its currency was fixed.

17. What Harm Can A Currency War Do?
A currency devaluation, deliberate or not, can damage a nation's economy by causing
inflation. If its imports rise in price and it cannot replace those imports with locally sourced
products, the country's consumers simply get stuck with the bill for higher-priced products.
A currency devaluation becomes a currency war when other countries respond with their own
devaluations, or with protectionist policies that have a similar effect on prices. By forcing up prices
on imports, each participating country may be worsening their trade imbalances instead of
improving them.
Impact of currency war :
• Impact on economies:
If a country is successful in a currency war, its exports will be cheaper, and imports will be
minimized. This would improve the trade balance. If the interest rates were lowered to devalue its

18. currency, it might have the effect of spurring economic growth. It should be noted that there is always
a risk that the country would end up with high import costs. Higher import costs can lead to higher
inflation.
If a country loses out in a currency war, its exports will become more expensive, and imports will
become cheaper. This can affect the trade balance and the domestic industries.
• Impact on Investors :
When a country’s currency is devalued, the value of returns for overseas investors might drop. This
expectation itself might lead overseas investors to pull out. The outflow of capital can lower asset
prices.
When a country’s currency is expected to appreciate, the value of returns for overseas investors might
increase. This expectation might lead to an inflow of investments from overseas investors. The inflow
of capital can boost asset prices.

19. What are the reasons for a currency war?
Currency wars occur when multiple countries try to gain an advantage in international trade based on
the value of their currencies. When a currency is devalued, it discourages imports as they will become
costlier and might boost exports as they would be cheaper to other countries.
HOW DOES INTERNATIONAL CURRENCY WAR WORK
AND ITS IMPACT ON INDIA :
A currency war is a conflict between nations in which each tries to enhance its exports by further
devaluing its currency. Currency conflicts are generally acknowledged to be destructive to all nation
that participate in them. While India has not experienced currency wars, we came dangerously near in
September 2015 when China purposefully devalued the Yuan. As a result, most emerging markets have
devalued their currencies in order to remain competitive in terms of exports. India had no choice but
to allow the INR to fall.

20. WHAT IS CURRENCY MANIPUATION?
Currency manipulation is when a government or central bank introduces monetary policy or other
measures with the intent of weakening its own currency or that of another country.
HOW CURRENCY MANIPULATION CAN LEAD TO A
CURRENCY WAR?
A currency war can break out after a country deliberately devalues its own currency and prompts
another nation to do the same. This is also known as ‘competitive devaluation’. Countries purposely
cause their currencies to depreciate in the hope it can invigorate economic growth and give them an
edge over other nations.
Currency wars are all about tit for tat. If a country has devalued their currency, then others can regard
it as an act of economic war and respond in kind. A country only devalues its own currency out of self-
interest and at the expense of other countries, which in turn do not like to feel as if they are losing out

21. It is important to stress that a country can aim to weaken its own currency without intending to ignite
a currency war, but if another country responds by devaluing its own currency then a war can break
out nonetheless.
WHAT DO COUNTRIES TRY TO ACHIEVE IN A CURRENCY
WAR?
A country devalues its currency in order to decrease its trade deficit. The goods it exports become
cheaper, so sales rise. The goods it imports become more expensive, so their sales decline in favor of
domestic products. The end result is a better trade balance.
The problem is, other nations may respond by devaluing their own currencies or imposing tariffs and
other barriers to trade. The advantage is lost.
HOW DO CURRENCY WARS END ?

22. the winners to improve their trade balance. The losers of currency wars will have expensive exports
and cheaper imports. The companies from the losers of currency wars will find it difficult to compete
with foreign companies.
HOW TO TRADE CURRENCY WARS ?
If history is anything to go by, a currency war has no winners in the long run. But the outbreak of one
can provide opportunities for foreign exchange traders. Currency wars introduce volatility. Currencies
trade in pairs and if one currency is to fall then another must rise.
HISTORY OF CURRENCY TRADE
Up to 1930
For millennia, going back to at least the Classical period, governments have often devalued their
currency by reducing its intrinsic value. Methods have included reducing the percentage of gold in

23. coins, or substituting less precious metals for gold. However, until the 19th century,the proportion
of the world's trade that occurred between nations was very low, so exchanges rates were not
generally a matter of great concern. Rather than being seen as a means to help exporters, the
debasement of currency was motivated by a desire to increase the domestic money supply and the
ruling authorities' wealth through seignior age , especially when they needed to finance wars or
pay debts. A notable example is the substantial devaluations which occurred during the Napoleonic
wars. When nations wished to compete economically they typically practiced mercantilism – this
still involved attempts to boost exports while limiting imports, but rarely by means of
devaluation. A favored method was to protect home industries using current account controls such
as tariffs. From the late 18th century, and especially in Britain, which, for much of the 19th
century, was the world's largest economy, mercantilism became increasingly discredited by the
rival theory of free trade, which held that the best way to encourage prosperity would be to allow
trade to occur free of government imposed controls. The intrinsic value of money became

24. formalized with a gold standard being widely adopted from about 1870–1914, so while the global
economy was now becoming sufficiently integrated for competitive devaluation to occur there was
little opportunity. Following the end of World War I, many countries other than the US experienced
recession and few immediately returned to the gold standard, so several of the conditions for a
currency war were in place. However, currency war did not occur as the U.K. was trying to raise the
value of its currency back to its pre-war levels, effectively cooperating with the countries that wished
to devalue against the market . By the mid-1920's many former members of the gold standard had
rejoined, and while the standard did not work as successfully as it had pre war, there was no
widespread competitive devaluation.
Currency war in the Great Depression
During the Great Depression of the 1930s, most countries abandoned the gold standard. With
widespread high unemployment, devaluations became common, a policy that has frequently been

25. described as "beggar thy neighbour",in which countries purportedly compete to export
unemployment. However, because the effects of a devaluation would soon be offset by a
corresponding devaluation and in many cases retaliatory tariffs or other barriers by trading partners,
few nations would gain an enduring advantage.
The exact starting date of the 1930s currency war is open to debate.The three principal parties were
Britain, France, and the United States. For most of the 1920s the three generally had coinciding
interests; both the US and France supported Britain's efforts to raise Sterling's value against market
forces. Collaboration was aided by strong personal friendships among the nations' central bankers,
especially between Britain's Montagu Norman and America's Benjamin Strong until the latter's early
death in 1928. Soon after the Wall Street Crash of 1929, France lost faith in Sterling as a source of
value and begun selling it heavily on the markets. From Britain's perspective both France and the US
were no longer playing by the rules of the gold standard. Instead of allowing gold inflows to increase
their money supplies (which would have expanded those economies but reduced their trade
surpluses) France and the US began sterilizing the inflows, building up hoards of gold. These factors

26. contributed to the Sterling crises of 1931; in September of that year Britain substantially devalued
and took the pound off the gold standard. For several years after this global trade was disrupted by
competitive devaluation and by retaliatory tariffs. The currency war of the 1930s is generally
considered to have ended with the Tripartite monetary agreement of 1936.
Bretton Woods era
1973 to 2000
While some of the conditions to allow a currency war were in place at various points throughout this
period, countries generally had contrasting priorities and at no point were there enough states
simultaneously wanting to devalue for a currency war to break out.On several occasions countries
were desperately attempting not to cause a devaluation but to prevent one. So states were striving
not against other countries but against market forces that were exerting undesirable downwards
pressure on their currencies. Examples include The United Kingdom during Black Wednesday and

27. various tiger economies during the Asian crises of 1997. During the mid-1980s the United States did
desire to devalue significantly, but were able to secure the cooperation of other major economies
with the Plaza Accord. As free market influences approached their zenith during the 1990s, advanced
economies and increasingly transition and even emerging economies moved to the view that it was
best to leave the running of their economies to the markets and not to intervene even to correct a
substantial current account deficit.
2000 to 2008
During the 1997 Asian crisis several Asian economies ran critically low on foreign reserves, leaving
them forced to accept harsh terms from the IMF, and often to accept low prices for the forced sale of
their assets. This shattered faith in free market thinking among emerging economies, and from about
2000 they generally began intervening to keep the value of their currencies low.This enhanced their
ability to pursue export led growth strategies while at the same time building up foreign reserves so

28. they would be better protected against further crises. No currency war resulted because on the
whole advanced economies accepted this strategy—in the short term it had some benefits for their
citizens, who could buy cheap imports and thus enjoy a higher material standard of living.
The current account deficit of the US grew substantially, but until about 2007, the consensus view
among free market economists and policy makers like Alan Greenspan, then Chairman of the
Federal Reserve, and Paul O'Neill, US Treasury secretary, was that the deficit was not a major reason
for worry.
This is not say there was no popular concern; by 2005 for example a chorus of US executives along
with trade union and mid-ranking government officials had been speaking out about what they
perceived to be unfair trade practices by China.
Economists such as Michael P. Dooley, Peter M. Garber, and David Folkerts -Landau described the
new economic relationship between emerging economies and the US as Bretton Woods II.

29. Competitive devaluation after 2009
On 27 September 2010, Brazilian Finance Minister Guido Mantega announced that the world is
"in the midst of an international currency war." Numerous financial journalists agreed with
Mantega's view, such as the Financial Times' Alan Beattie and The Telegraph's Ambrose Evans-
Pritchard. Journalists linked Mantega's announcement to recent interventions by various
countries seeking to devalue their exchange rate including China, Japan, Colombia, Israel and
Switzerland.

30. For much of 2009 and 2010, China was under pressure from the US to allow the yuan to appreciate.
Between June and October 2010, China allowed a 2% appreciation, but there were concerns from
Western observers that China only relaxed its intervention when under heavy pressure. The fixed peg
was not abandoned until just before the June G20 meeting, after which the yuan appreciated by about
1%, only to devalue slowly again, until further US pressure in September when it again appreciated
relatively steeply, just prior to the September US Congressional hearings to discuss measures to force a
revaluation.
Reuters suggested that both China and the United States were "winning" the currency war, holding
down their currencies while pushing up the value of the Euro, the Yen, and the currencies of many
emerging economies.
A contrasting view was published on 19 October, with a paper from Chinese economist Huang
Yiping arguing that the US did not win the last "currency war" with Japan,and has even less of a
chance against China; but should focus instead on broader "structural adjustments" at the

31. November 2010 G-20 Seoul summit.
In the first half of 2011 analysts and the financial press widely reported that the currency war had
ended or at least entered a lull, though speaking in July 2011 Guido Mantega told the Financial
Times that the conflict was still ongoing.
In March 2012, Rousseff said Brazil was still experiencing undesirable upwards pressure on its
currency, with its Finance Minister Guido Mantega saying his country will no longer "play the fool"
and allow others to get away with competitive devaluation, announcing new measures aimed at
limiting further appreciation for the Real. By June however, the Real had fallen substantially from its
peak against the Dollar, and Mantega had been able to begin relaxing his anti-appreciation
measures.
Currency war in 2013
In mid January 2013, Japan's central bank signaled the intention to launch an open ended bond

32. alarm about the risk of a possible fresh round of currency war.
Numerous senior central bankers and finance ministers issued public warnings, the first being Alexei
Ulyukayev, the first deputy chairman at Russia's central bank. He was later joined by many others
including Park Jae-wan, the finance minister for South Korea, and by Jens Weidmann, president of
the Bundesbank. Weidmann held the view that interventions during the 2009–11 period were not
intense enough to count as competitive devaluation, but that a genuine currency war is now a real
possibility. Japan's economy minister Akira Amari has said that the Bank of Japan's bond buying
program is intended to combat deflation, and not to weaken the yen.
On 15 February, a statement issued from the G20 meeting of finance ministers and central bank
governors in Moscow affirmed that Japan would not face high level international criticism for its
planned monetary policy. In a remark endorsed by US Fed chairman Ben Bernanke, the IMF's
managing director Christine Lagarde said that recent concerns about a possible currency war had
been “over blown”. Paul Krugman has echoed Eichengreen's view that central bank's

33. currency war. Goldman Sachs strategist Kamakshya Trivedi has suggested that rising stock markets
imply that market players generally agree that central bank's actions are best understood as
monetary easing and not as competitive devaluation. Other analysts have however continued to assert
that ongoing tensions over currency valuation remain, with currency war and even trade war still a
significant risk. Central bank officials ranging from New Zealand and Switzerland to China have made
fresh statements about possible further interventions against their currencies.
From March 2013, concerns over further currency war diminished, though in November several
journalists and analysts warned of a possible fresh outbreak. The likely principal source of tension
appeared to shift once again, this time not being the U.S. versus China or the Eurozone versus Japan,
but the U.S. versus Germany. In late October U.S. treasury officials had criticized Germany for
running an excessively large current account surplus, thus acting as a drag on the global economy.

34. Currency war in 2015
A €60bn per month quantitative easing program was launched in January 2015 by the European
Central Bank. While lowering the value of the Euro was not part of the program's official objectives,
there was much speculation that the new Q.E. represents an escalation of currency war, especially
from analysts working in the FX markets. David Woo for example, a managing director at Bank of
America Merrill Lynch, stated there was a "growing consensus" among market participants that
states are indeed engaging in a stealthy currency war. A Financial Times editorial however claimed
that rhetoric about currency war was once again misguided.
In August 2015, China devalued the yuan by just under 3%, partially due to a weakening export
figures of −8.3% in the previous month.The drop in export is caused by the loss of competitiveness
against other major export countries including Japan and Germany, where the currency had been
drastically devalued during the previous quantitative easing operations. It sparked a new round of
devaluation among Asian currencies, including the Vietnam dong and the Kazakhstan tenge.

35. COMPARISON BETWEEN 1932 AND 21ST-CENTURY
CURRENCY WARS
Migrant Mother by Dorothea Lange (1936). This portrait of a 32-year-old farm-worker with seven
children became an iconic photograph symbolizing defiance in the face of adversity. A currency
war contributed to the worldwide economic hardship of the 1930s Great Depression.

36. Both the 1930s and the outbreak of competitive devaluation that began in 2009 occurred during
global economic downturns. An important difference with the 2010s is that international traders
are much better able to hedge their exposures to exchange rate volatility because of more
sophisticated financial markets. A second difference is that the later period's devaluations were
invariably caused by nations expanding their money supplies by creating money to buy foreign
currency, in the case of direct interventions, or by creating money to inject into their domestic
economies, with quantitative easing. If all nations try to devalue at once, the net effect on exchange
rates could cancel out, leaving them largely unchanged, but the expansionary effect of the
interventions would remain. There has been no collaborative intent, but some economists such as
Berkeley's Barry Eichengreen and Goldman Sachs's Dominic Wilson have suggested the net effect
will be similar to semi-coordinated monetary expansion, which will help the global
economy. James Zhan of the United Nations Conference on Trade and Development (UNCTAD),
however, warned in October 2010 that the fluctuations in exchange rates were already causing
corporations to scale back their international investments.

37. Comparing the situation in 2010 with the currency war of the 1930s, Ambrose Evans-Pritchard of The
Daily Telegraph suggested a new currency war may be beneficial for countries suffering from trade
deficits. He noted that in the 1930s, it was countries with a big surplus that were severely impacted
once competitive devaluation began. He also suggested that overly-confrontational tactics may
backfire on the US by damaging the status of the dollar as a global reserve currency. Ben Bernanke,
chairman of the US Federal Reserve, also drew a comparison with competitive devaluation in the
interwar period, referring to the sterilization of gold inflows by France and America, which helped
them sustain large trade surpluses but also caused deflationary pressure on their trading partners,
contributing to the Great Depression. Bernanke stated that the example of the 1930s implies that the
"pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global
growth and stability are not taken into account."
In February 2013, Gavyn Davies for The Financial Times emphasized that a key difference between
the 1930s and the 21st-century outbreaks is that the former had some retaliations between countries
being carried out not by devaluations but by increases in import tariffs, which tend to be much more

38. disruptive to international trade.
CURRENCY WAR VS. 'COMPETITIVE DEVALUATION'
"Currency war" is not a term that is loosely bandied about in the genteel world of economics and
central banking, which is why former Brazilian Finance Minister Guido Mantega stirred up a hornet's
nest in September 2010 when he warned that an international currency war had broken out.2
In more recent times, nations that adopt a strategy of currency devaluation have underplayed their
activities, referring to it more mildly as "competitive devaluation."
A currency war is sometimes referred to by the less-threatening term "competitive devaluation."
In 2019, the central banks of the U.S., the Bank of England, and the European Union were engaged in
a "covert currency war," according to a report in CNBC. With interest rates at rock bottom, currency
devaluation was one of the only weapons the central banks had left to stimulate their economies.
In the same year, after the Trump administration imposed tariffs on Chinese goods, China retaliated
with tariffs of its own as well as devaluing its currency against its dollar peg. That could have

39. escalated a trade war into a currency war.
THE BOTTOM LINE
A currency war takes place when two or more countries engage in practices that devalue their own
currencies, in an attempt to stimulate demand for their products. Such devaluations also have the
effect of increasing the cost of imports, which can spur consumers to buy domestic goods instead.
Combined, this can spur employment and growth, but it also risks inflation and capital outflows. If
currency depreciation policies are not accompanied by other economic reforms, eventually its
advantages will be lost as other countries take the same actions.
ARE WE IN A CURRENCY WAR?
The situation in 2022 is different from that of 2010. In 2022, countries want to curb inflation but
also want to avoid or delay hurting domestic industries through higher borrowing costs.

41. One of the measures used by central banks to curb inflation is raising interest rates, as it lowers
spending. Just like lowering interest rates can depreciate a currency, hiking interest rates can
appreciate a currency.
GLOBAL PERSPECTIVES
Developed economies
The US, and to a lesser extent the UK, share a position where they have independent currencies in
addition to twin deficits – both large current account deficits and large fiscal deficits. Though
austerity program can address their fiscal deficits, the effect of these can only be to move debt
from the public to private sector, unless the countries begin earning more than they spend – in
other words their overall debt can only be paid off by going into current account surplus. Lowering
their exchange rates, especially against the yuan, is considered by government officials and by
most economists as an important part of their approach to transition towards current account

42. surpluses. The UK and US have not directly intervened to devalue their currencies, however their QE
program have exerted downwards exchange rate pressure. In October 2010 analysts were expecting the
UK and US to employ additional Quantitative Easing. After Japan's intervention in the week of 5 October,
there was speculation that the US Federal Reserve would also intervene to inject more money into the
economy via another round of QE (QE2), hence for a short time after the dollar depreciated slightly.
Quantitative easing program were deployed by the Federal Reserve from 2009 to stimulate investment and economic growth within the US.
As a side effect, they contribute to capital flowing into emerging countries, pushing up the value of their currencies.

43. By mid October 2010, the dollar had dropped 7% since a 27 August speech by Federal Reserve
Chairman Ben Bernanke in which he said there was a possibility of further easing monetary policy. On
18 October, US Treasury Secretary Tim Geithner stated "It is very important for people to understand
that the United States of America and no country around the world can devalue its way to prosperity
and competitiveness." Following this statement the value of the dollar rose as speculators calculated
that at least in the short term it would be less likely for the US to intentionally devalue its currency.
In late October the US unveiled a suggestion to address the broader issues relating to trade
imbalances by introducing indicative guidelines that for most countries would target a maximum
current account surplus of 4% of GDP. While the plan attracted immediate opposition, the general
notion of limiting excessive surpluses achieved cautious support at the October meeting of G20 finance
ministers, including from China. By early November opposition from Germany and China had
strengthened, leading the US to apparently back down from the plan, though speaking three days
before the November G20 summit President Obama suggested the US would be pushing hard for an

44. Australia, Canada and New Zealand all appear to have refrained from intervening against their
currencies or from imposing new capital controls and have each seen substantial appreciation of their
currencies in 2010. However both Australia and Canada have strong economies and are rich in natural
resources. According to Moody's, negative effects from New Zealand's appreciation is offset by the fact
that her currency has depreciated with respect to Australia, her biggest customer.
Eurozone
The Eurozone is a special case where some members, principally Germany, enjoy a large current
account surplus and so could accept or even benefit from currency appreciation. Other countries
though such as Greece, Spain, Portugal and Ireland have twin deficits and so to a large extent would
benefit from a depreciation. While the European Central Bank (ECB) did practice some QE in 2009, this
was to a much lower extent than the US or UK, and they did not deploy a second round. The value of
the Euro has been effectively left to float, and in fact early in 2010 central authorities intervened to
defend the Euro's value against the market. Following the generally positive results from bank stress

45. testing that were released in summer, market participants stopped speculating against the Euro, and
the currency has tended to rise as a result of other countries practicing competitive devaluation. A
major driver for the rise in the Euro in the latter half of 2010 was China's purchase of Euro-
denominated bonds. While China's intervention was in some ways helpful for the Eurozone, it also
generated concern with several European officials speaking out against the action. These officials
included: ECB governor Jean-Claude Trichet and Euro group president Jean-Claude Juncker.
Japan
Japan also has a large current account surplus, and in 2009 and 2010 the country allowed the Yen to
appreciate. However, in September 2010 Japan twice intervened to effect a devaluation. Japan has a
number of challenges that limit its ability to allow ongoing currency appreciation, including an aging
population, high government debt (though not net debt as it has high private savings) and
vulnerability to deflation. The September devaluation did not draw widespread international
condemnation. Within a couple of weeks upwards pressure on the Yen from the markets had almost

46. entirely undone the effect of the intervention. However shortly after the March 2011 earthquake, other
G7 nations joined Japan in a rare act of solidarity, selling billions of Yen to help Japan devalue its
currency against pressure from speculators who were betting on a further appreciation, as insurance
firms recalled funds from abroad.
Emerging markets
India has largely taken a neutral position on the currency war, advocating a balanced solution with
give and take by both China and the US, though along with Brazil she has been one of the few
emerging economies to occasionally criticize China's holding down of the Yuan Prime
Minister Manmohan Singh suggested the currency war can be viewed as part of a power struggle
between the US and China and that India will have to play a role to ensure a balanced outcome.

47. As China's exporters were hit by the global recession in 2008, the People's Bank of China began stepping up her intervention program to prevent appreciation of the Yu
By April 2011 Chinese state controlled banks had accumulated over one trillion in US treasuries and over 1.5 trillion in other dollar assets. China has indicated she plans
further rebalance her economy towards domestic consumption, and intends to stop buying dollar assets by 2016.
China has a large current account surplus and huge foreign reserves along with the potential to transitio
towards domestic demand-led growth, allowing it to appreciate the yuan and reduce the current account
surplus while still maintaining high GDP growth and decreasing unemployment. However, its economy ha
long been geared towards export-led growth, and hence a substantial appreciation could cause a sharp ris
in unemployment, as China's premier warned in early October 2010. Economic commentators such as Mar

48. Wolf have speculated that China is wary of complying with pressure to allow a substantial currency
appreciation as she considers the long period of stagnation Japan experienced after the Plaza
accord as in part resulting from Japan allowing a substantial appreciation of her currency against the
dollar.
China issued its own "warning" against being made a "scapegoat" for the US's failings. China
accused the US of waging the currency war and that it has "exercised financial policies characterized
as 'economic egoism.'" In April 2011, the Financial Times reported that Chinese officials have
signaled 2016 as a date when they expect to stop intervening against their currency by buying dollar
assets.
Latin America
Brazil is a large economy which has generally allowed their currency to float freely, with the
exception of some low level interventions to counter large capital inflows resulting from major stock
sales. As a result, since early 2009 her currency has risen substantially against the dollar, with

49. Goldman Sachs saying the real is the most over valued currency in the world.In October 2010, Brazil
began increasing her capital controls, doubling a tax on foreign purchases of fixed-income assets to
4 percent so as to curb the real's appreciation to a two-year. On 18 October, Brazil sought to curb the
real's gains by raising taxed capital inflow on fixed-income assets by 2% to 6% and taxed inflows
for margin deposits on futures to 6% from 0.38%.
Other Asian economies
Over the first 9 months of 2010 the baht had risen in value by 11 %, the second largest appreciation
of Asia's 11 most heavily traded currencies. There were also concerns that exports may slow: sales to
foreigners make up almost two-thirds of Thai's economic activity. Prime Minister Abhisit
Vejjajiva also said Thailand may step up efforts to prevent currency appreciation from hurting its
exporters.

50. Others
Africa was hit harder by the global financial crises than other emerging regions. African countries may
not however be as adversely affected by a currency war, as one of the regions problems is the collapse of
foreign investment following the crisis, so increased international investment resulting from QE2 may
actually help Africa rather than excessively drive up its currencies as is feared for other emerging
regions. However South African Finance Minister Pravin Gordhan has warned that currency wars could
lead to "trade wars" if allowed to continue.
The threat of a currency war would adversely affect the Caricom community because the various
currencies are either tied to or float against the US dollar. Export and tourism earnings are closely
linked to the US or Europe, thus there is a strong dependency on the said regions unlike Latin America
which has diversified its markets in the previous decade.

51. EXAMPLES OF CURRENCY WARS
Monetary policy changes and it can be difficult to define whether a currency war has broken out.
Numerous countries can introduce measures aimed at weakening their own currency without
intending to start a currency war. Still, it is widely recognized that there have been three major
currency wars so far, even if there have been smaller battles along the way.
Currency war I: the gold standard after World War I
The first currency war started in the 1930s. Before World War I erupted, the value of most major
currencies was derived from the price of gold. Countries pegged their currency to the metal, and this
was known as the ‘gold standard’. However, countries needed to print more money to fund the
staggering costs of the war.
The gold standard provided stability in foreign exchange markets, but it also provided limited
flexibility to governments. This prompted countries to abandon the gold standard to help manage the
huge financial burden of the war, but once it was over most of them craved the relative stability it

52. brought and tried to return to it.
This was an issue for most countries as the amount of gold available to underpin a currency had
barely changed, but countries now had significantly more money in circulation. This meant several
countries, including Germany and France, decided to devalue their currencies to readopt the gold
standard. The fact others like the UK and the US decided to raise the value of their own currencies
by readopting the gold standard at the pre-war rate largely prevented a race to the bottom in terms
of a currency war.
However, the widespread support for the gold standard started to dissipate as financial trouble hit
Europe. Driven by German hyperinflation, the meltdown started to spread across Europe, enough so
that pressure started to be exerted on the pound, forcing the UK to action.
The UK’s response was unexpected. While many expected the country to raise interest rates in
response, it decided to abandon the gold standard altogether. This resulted in the pound
significantly depreciating against almost every other currency, making British exports much more

53. implementing controls on capital flows and slapping tariffs on imports. The UK’s abandonment of the
gold standard inspired numerous other countries to follow suit, but most of Europe continued to use
it, causing a division between those that used it and those that didn’t.
The devaluations, tariffs, capital controls and other measures escalated as a result. This gradually
hammered the global economy and those that were using the gold standard once again found
themselves with little wiggle room with which to respond. For example, as the downturn in global
trade started to send the US into the Great Depression, the Federal Reserve’s (Fed's) ability to
intervene was limited as it had to have a set amount of gold to back the amount of currency in issue,
and getting hold of large amounts of gold so you can print more money is not easy nor cheap. This
was exacerbated by the fact people started hoarding gold – depleting the Fed’s gold reserves – as the
downturn took hold. The then US president, Franklin D Roosevelt, effectively scrapped the gold
standard by forcing everyone to turn in their gold to the Fed in return for dollars, and stopping them
from trading their dollars in for gold. This was how the world-renowned Fort Knox gold reserve was

54. When the downturn started to ease and the Great Depression ended in 1939, countries were once
again keen to return to the gold standard but were aware it wasn’t perfect. This resulted in the
Bretton Woods Agreement being signed in 1944, which set how much each currency was worth in
terms of gold. As the US held most of the world’s gold, more countries started to peg their
currencies to the dollar, which itself was still technically underpinned by gold. This gradually saw
countries start to peg their currencies to other currencies rather than gold. This is why the dollar
remains the world’s official reserve currency today.
Currency war II: Abandoning in the gold standard
The Bretton Woods Agreement was successful in preventing another currency war for over 20 years
and offered relative stability to currency markets. But this came to an end when the UK, suffering
from high inflation, decided to devalue the pound against the dollar in 1967, which opened the
doors for others to do the same. The US was suffering from the same inflationary problems as the UK
but, whereas the pound and other currencies were now pegged to the dollar, the dollar was still

55. pegged to gold (even if the dollars couldn’t be converted into gold). This meant that if the US wanted to
retaliate and devalue the dollar in response then it would have to rebase the value of gold.
Having suffered several recessions, the US decided to formally abandon the gold standard altogether:
the value of a dollar would no longer be derived from gold, which meant those currencies pegged to the
dollar weren’t either. In 1973, the International Monetary Fund (IMF) brought an end to the Bretton
Woods Agreement by introducing free-floating exchange rates that would manage themselves and
change daily, which is the system that we know today. This meant the dollar no longer derived its value
from a specific asset.
Currency war III: a race to the bottom
The term ‘currency war’ was only coined during the latest one, when Brazil’s finance minister Guido
Mantega claimed one had broken out between the US, China and others. He argued that they had
sparked a race to devalue their currencies to gain a competitive edge and said this was causing the
currencies of Brazil and other emerging economies to rise and hurting economic growth. China, which

56. pegged the yuan to the dollar in 2007, had been spending billions of dollars to keep its own currency
weak against that of the US. Japan had done the same by selling yen and buying dollars. Numerous
countries, including Switzerland and Israel, also tried to lower the value of their currencies.
This slowly strengthened the dollar, which in the past would have suited the US and its policy to have
a strong dollar. However, over time the US now feels other countries, particularly China, have
purposely kept the value of their currencies low relative to the dollar in order to secure large trade
surpluses and an advantage over US companies.
Will the US and China keep currency war III going?
Some argue that currency war III is still underway, led by growing tensions between the US and China.
The US has been gradually shifting away from its strong dollar policy and now, with the US President
Donald Trump in the White House, is aiming to weaken the dollar to make US manufacturers and
exporters more competitive. As far as the US is concerned: the reason the US has such a large trade
deficit with China is because it has purposely kept the value of the yuan low for decades, and for this

57. to change the dollar must weaken and the yuan must strengthen.
The current fears surrounding currency wars have emerged after China refused to intervene to stop the
yuan from devaluing further against the dollar. It has traditionally ensured that one dollar would equal
no more than six yuan, but recently let that slip to over seven yuan to prompt fears that China is
manipulating its currency. That is significant as it comes at a time when trade tensions between the
two countries are already high, demonstrating that countries devalue their currencies as part of a
wider strategy involving tariffs, capital controls and other trade policies.
EXAMPLE: BRAZIL
In the global “currency war”, Brazil has tended to align itself with China in criticizing the US’s
expansionary monetary policy, yet remaining noticeably quiet in public when it comes to China’s
international policies. This is ultimately more politics than economics, with China now buying more
than 12% of Brazil’s exports – now its biggest single market overtaking the US in 2009.

58. CHINA’S ROLE:
China has been a prominent player in currency wars, maintaining a controlled exchange rate to
support its export-driven economy.
QUANTITATIVE EASING (QE):
The United States employed quantitative easing measures to stimulate its economy, contributing to a
weakening of the U.S. dollar.
CONCLUSION
Currency wars are complex phenomena with both short-term benefits and long-term risks. While
countries may use devaluation as a strategy to gain a competitive edge, the overall impact on the
global economy requires careful consideration. Policymakers must balance the potential advantages of
a weaker currency with the associated challenges to ensure stability and sustainable growth.

59. MY VIEW ON CURRENCY WAR
My view on the topic “CURRENCY WAR” is that Currency War is a condition where other
countries seek to gain a international trade advantage over other countries by causing the
exchange rate of their currency to fall. When exchange rate falls, exports become more
competitive in other countries and imports become more expensive. Both domestic industry
and employment receives benefit in demand from both domestic and foreign market.
It is a policy among two or more nations. Currency prices fluctuate constantly in the Foreign
Exchange Market.
Nations devalue their currencies primarily to make their own exports more attractive.
A currency war is a tit-for-tat policy. The combination of export-led growth and increased
domestic demand contributes to a higher employment and faster economic growth. But, it
may also lower a nation’s productivity.

60. Economists view currency wars as harmful to the global economy.
The world had been divided into “Deficit” countries and “Surplus” countries.
Currency war can escalate into trade disputes, can lead to heightened volatility in financial
market, can spur inflation in importing countries and deflation in exporting countries, and can
contribute to a slowdown in global economic growth.
During the Great Depression of the 1930s, most countries abandoned the gold standard. With high
unemployment, devaluations became common.
Both the 1930s and the outbreak of competitive devaluation that began in 2009 occurred during
global economic downturns.
“A currency war takes place when two or more countries engage in practices that devalue their
own currencies.

61. BIBLIOGRAPHY
1. https://en.wikipedia.org/
2. https://soundsandcolours.com/
3. https://www.bbc.com/
4. https://organiser.org/
5. https://edukemy.com/
6. https://www.japantimes.co.jp/
7. https://www.investopedia.com/
8. https://wealthdesk.in/
9. https://www.ig.com/