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    Currency War - Reasons and Repercussions

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    Raja Raja
    Currency wars occur when countries deliberately devalue their currencies to gain a competitive trade advantage. This document discusses the reasons for currency devaluation including relieving unfavorable trade balances and boosting competitiveness. It also examines the effects, such as improved trade balances and expanded output and employment. However, currency wars increase risks like policy uncertainty and supply chain disruptions. While weaker currencies can boost exports and inflation, there are also negatives like reduced productivity if not accompanied by reforms.

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    Currency War - Reasons and Repercussions

    Uploaded by

    Raja Raja
    8K views15 pages
    Currency wars occur when countries deliberately devalue their currencies to gain a competitive trade advantage. This document discusses the reasons for currency devaluation including relieving unfavorable trade balances and boosting competitiveness. It also examines the effects, such as improved trade balances and expanded output and employment. However, currency wars increase risks like policy uncertainty and supply chain disruptions. While weaker currencies can boost exports and inflation, there are also negatives like reduced productivity if not accompanied by reforms.

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    Currency war -reasons and repercussions by Kunal

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    Currency war -reasons and repercussions

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    Currency wars occur when countries deliberately devalue their currencies to gain a competitive trade advantage. This document discusses the reasons for currency devaluation including relieving unfavorable trade balances and boosting competitiveness. It also examines the effects, such as improved trade balances and expanded output and employment. However, currency wars increase risks like policy uncertainty and supply chain disruptions. While weaker currencies can boost exports and inflation, there are also negatives like reduced productivity if not accompanied by reforms.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    8K views15 pages

    Currency War - Reasons and Repercussions

    Uploaded by

    Raja Raja
    Currency wars occur when countries deliberately devalue their currencies to gain a competitive trade advantage. This document discusses the reasons for currency devaluation including relieving unfavorable trade balances and boosting competitiveness. It also examines the effects, such as improved trade balances and expanded output and employment. However, currency wars increase risks like policy uncertainty and supply chain disruptions. While weaker currencies can boost exports and inflation, there are also negatives like reduced productivity if not accompanied by reforms.

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    Currency War-Reasons and

    repercussions
    What is currency wars ?

    • Currency wars, also known as competitive devaluations, is a


    condition in international affairs where countries seek to gain a
    trade advantage other countries by causing the exchange rate of
    their currency to fall in relation to others.
    • A currency war refers to a situation where a number of nations
    seeks to deliberately depreciate the values their domestic
    currency in order to stimulate their economies
    It’s a manipulation of currency
    Need for devaluation
    • Overvalution of currency associated with import substitution for
    industrialization as opposed to export promotion policies.
    • The risk of losing competitivemess.
    • To relieve an unfavourable balance of trade.
    • Economic stabilization.
    • Correcting the price distortions.
    • To increase competitiveness in foreign market.
    • To increase national income per capita.
    • Close the development gap.
    • Restrictions on commodity as well as capital flows.
    The effects of devaluation
    • Improve trade balance. ( see fig. 1.1)
    • Alleviate balance of payment difficulties.
    • Accordingly expand output and employment.
    Fig. 1.1
    The impact of currency wars
    • A fresh outbreak of ‘currency wars’ will significantly increase
    risks for cross-boarder trade and investment.
    • The key risks will be associated with certainty over government
    policy ,currency volatility and supply change disruption.
    • Countries with floating currencies are set to experience better
    economic conditions than those with pegged currencies.
    • The incidence of trade disputes between countries is set to
    rise ,impacting on supply chains.
    Key risks of currency war
    Currency wars- is a weaker currency
    good or bad ?
    • Key points
    • Although central banks are using the available tools to fight
    deflation, we don’t see this as a ‘currency war’.
    • A weaker currency can help an economy to potentially boosting
    exports, jobs and inflation, as well as increasing corporate
    earnings.
    • A strong currency, such as the U. S. Dollars, can cut
    international stock returns, so investors may want to rose
    Exchange Traded Funds (ETF’s) or mutual funds that hedge
    currency exposure.
    Why would you want a weaker currency ?

    • Export growth –A country’s exports can gain market share as its goods
    get cheaper relative to goods priced in stronger currencies. The
    resulting increases in sales can boost economic growth and jobs, as
    well as increase corporate profits for companies that have business in
    foreign market.
    • Rising inflation- Inflation can climb when economies import goods
    from countries with stronger currencies, since it takes more of a weak
    currency to buy the same amount of goods priced in a stronger
    currency.
    • Relief for debtors – A weak currency can boost inflation, and therefore
    income and tax receipts, while the value of debts is unchanged,
    making it easier for local currency borrowers to pay down debts.
    Is there negative impacts of currency war ?

    • Currency devaluation may lower productivity in the long terms,


    since imports of capital equipment and machinery become too
    expensive for local business. If currency depreciation is not
    accompanied by genuine structural reforms, productivity will
    actually suffer.
    • The degree of currency depreciation may be greater than what is
    desired, which may eventually cause rising inflation and capital
    flows.
    • Competitive devaluations may cause an increase in currency
    volatility, which in turn would lead to higher hedging costs for
    companies and possibly deter foreign investment.

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