Talk of a “currency war” has emerged in the economic recovery
The term “currency war” is in the headlines at the moment – with currencies going through big shifts in value as countries exit from recession and try to speed up their economic recoveries. A currency war involves countries trying to depreciate their currencies to try to stimulate their economies. A weaker currency can stimulate exports, for example. But because not all currencies can be weak at the same time, the method can cause problems and lead to what is known as “competitive devaluations” or a “race to the bottom”.
Further details are included in our What is ... a currency war? article.
Even the IMF is warning about using currencies as a “policy weapon”
In past months, central banks in several countries have been intervening in foreign exchange markets. Perhaps most notably, the Bank of Japan weakened the yen after it had risen strongly against the US dollar over the past year. In addition, some have criticised the way China has managed the exchange rate of the yuan against the United States dollar over several years.
The situation is not so extreme that a currency war has broken out. However, International Monetary Fund (IMF) managing director Dominique Strauss-Kahn warned countries against using currencies as a “policy weapon” according to an article in The Economist magazine.
Investment magazine Barron’s wrote that Brazil Finance Minister Guido Mantega was “saying out loud what policy makers were saying in private” when he spoke out about the issue of “an international currency war” in an interview. The Brazilian real was at a 10-month high against the US dollar, impacting competitiveness.
An interactive graphic by Reuters maps currency movements in 11 markets and details significant announcements that relate to the shifts.