1. #1

    Join Date
    Aug 2011
    Lahore, Pakistan
    Blog Entries

    Ongoing Currency War: How Countries Use Weakness as Strength

    Conventional war is fought on strength and strategy. But these days, world is experiencing a silent war which is being fought using weakness as the main tool. In case, you could not figure out what this war is all about, let me inform you that this war is “Currency War”.

    It is war in which weakening of currency value is the strength that countries and unions such as European Union are trying to fight. So when Euro touched 1.09 to 1 dollar, the unofficial currency war came out in open. While many disagreed that it is a currency war, many others accepted that this was nothing less than currency war, though not declared.

    Currency war is being fought with two tools which are being used depending upon where a country stands. So some of the countries which already have low rate of interest and interest rates can’t be cut further, currency war is being fought using quantitative easing as a policy. While Federal Reserve has used it for a long time now, for European Union this is the latest weapon for unleashing currency war. So what is quantitative easing all about?

    As per one the leading newspapers of UK,

    “This is the process by which central banks, like the Bank of England, create money to buy financial assets. QE is sometimes known as ‘money-printing’.
    But in reality, no hard cash is actually created and most of us will never see it. Instead, a central bank is able to digitally create money, which is then deployed to purchase things like government debt in the form of bonds”. Quantitative easing helps in reducing the value of currency by circulating more currency in an economy.

    Some other countries like South Korea, India and China which are also part of this undeclared war have used another tool which is cutting the rate of interest. Reducing rate of interest may act as a disincentive to create more inflow of money in the economy. Till six months back, an investor could have easily earned 8.5% risk free rate of interest in India which is now down to less than 8%. This means that the inflow of money from India will go down now.

    While the debate on currency wars goes on, nobody can deny the fact that undeclared currency war has changed the outlook of many which including specifically those who are involved in market.

    As per Telegraph, UK,

    “Currency dealers, and the ubiquitous computerized trading robots, are influenced far less these days by growth or inflation forecasts than by the market’s view on the origin of the next splurge of quantitative easing”.
    Basically currencies have become a tool to manage international performance. Some economists and experts on finance have raised concern on this front.

    One of the leading expert on global currency state that the worlds leading economies have reduced themselves to blatantly competing less on the quality of what they produce than on the speed with which they can depreciate their currencies against one another. The lessons of history are that such situations are prone to escalate into rancor and, ultimately, conflict.

    Lowering of currency values has dual benefits for a country.

    First it brings more money as inflow in the economy and secondly it makes exports more competitive. With Euro depreciating fast against dollar, US residents can buy more Euros with same number of dollars. On the other hand, Euro based exporters can export more to US which is likely to hit US economy and add to unemployment and fall in production.

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