If you follow the financial news you may have recently heard about the currency war going on. Most people simply brush this aside not knowing exactly what it is and not thinking it pertains to them. However, currency wars are an important part of the global economy. A war begins when one country tries to devalue its currency in order to become more competitive in the world market. What happens is that other countries follow suit not wanting to lose their edge.
How it works
Basically how it works is that one country will increase their monetary supply. This sudden increase will cause the currency to become cheaper for other countries to buy it (we usually just call this inflation). Since most countries are not in the habit of buying and selling actual currency, the way it works is that the inflated country can now export their goods more easily. The importer will be able to purchase the same product for cheaper, thus the exporter will most likely see an increase in orders. The increase in orders will stimulate the economy of the exporting country.
Current War
The current war is not quite so straight forward. It started when Japan announced that they are doubling their inflation target to 2%. By any means 2% is still a relatively low inflation projection, but for a country that has been wracked by deflation in recent history, it is a giant step in the other direction. Those who run the European monetary supply called foul saying that Japan was simply trying to politicize the monetary system.
Currency wars are nothing new. In fact, they have been going on ever since economies were developed. However, they have recently been taking on new form and popularity since industrialization and world trade picked up speed. While before they were done through the manipulation of imports and exports, the new way for a country to make its currency more appealing is through manipulation of the monetary policy (think Quantitative Easing).
The idea of a currency war is often more alarming than the actual war itself. In fact, when they do come about, most people do not even notice what is going on. Many investors get nervous at the thought, because it could hurt their investments. However, there are ways to offset the losses and make the currency war work to your advantage (and it does not involve becoming a Forex expert). If you are a keen investor, knowing which companies will profit from a war should be a no-brainer. However, this current currency war still hasn’t occurred, and may very well only ever be a rumor.
I’ve often wondered about the relationship between China & America when it comes to currency issues. They both seem to have each other over a barrel but I wonder if there’s ever going to be a point that will make the situation untenable for either country.