For the past few weeks, the dollar has been fluctuating. Presidential election, COVID-19 pandemic, and the United States’ economic state are some of the suspected triggers to the fluctuating dollar. The scene signals the probability of a currency war. While it might sound a little terrifying, this war might not really be something we should be afraid of.
What is a currency war?
Investopedia defines a currency war to a state where numeral nations depreciate their domestic currencies for a certain purpose. What purpose? to stimulate their economies. While it is a common occurrence for countries to depreciate or devalues their currency, the practice is different in a currency war. A currency war involves several countries, and they may proceed with the evaluation simultaneously.
The less threatening term for a currency war is “competitive devaluation”. Countries commence with this strategy when the exchange rates are high. According to Investopedia, the nation’s central bank is the key for a country’s currency depreciation. They play with the countries’ economic policies, such as reducing interest rates or increasingly, “quantitative easing (QE)”.
Why do countries depreciate their currencies deliberately?
A strong currency is not necessarily a good thing. Weaker domestic currency lures in more countries for exports. Higher export volumes equal economic growth. Accordingly, imports become more expensive. Hence, people’s interest in local products also grow. Noted from Investopedia, this advance, in the terms of trade, means a weaker current account deficit, while simultaneously bring higher employment and faster GDP growth. The nation’s capital and housing markets may also get positively affected.
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