currency war:

reasons &
reprecussions….
1] What is currency war?
Currency war, also known as competitive
devaluations, is a condition in International affairs
where countries seek to gain a trade advantage
over other countries by causing the exchange rate
of their currency to fall in relation to other
currencies. As the exchange rate of country’s
currency falls, exports become more competitive in
other countries, and imports into the country
become more and more expensive. Both effects
benefit the domestic industry, and thus
employment, which receives a boost in demand
from both domestic and foreign markets. However,
the price increases for import goods are unpopular
as they harm citizens’ purchasing power, and when
all countries adopt a similar strategy. It can lead to
general decline in international trade, harming all
countries.

Historically competitive devaluations have been rare

as countries have generally preferred to maintain a
high value for their currency. Countries have
generally allowed market forces to work, or have
participated in systems of managed exchanges
rates. An exception occurred when a currency war
broke out in 1930s’ when countries abandoned the
gold standard during the Great Depression and
used currency devaluations in an attempt to
stimulate their economies. Since this effectively
pushes unemployment overseas, trading partners
quickly retailed with their own devaluations. The
period is considered to have been an adverse
situation for all concerned, as unpredictable
changes in exchange rates reduced overall
international trade.
2] What are the reasons for currency war?
The following are the major reasons for the
currency war:
1] To boost exports
On a world market, goods from one country
must compete with those from all other
countries. Car makers in America must
compete with car makers in Europe and
Japan. If the value of euro decreases against
the dollar, the price of the cars sold by
European manufacturers in America, in
dollars, will be effectively less expensive
than they were before.
On the other hand, a more valuable
currency makes exports relatively more
expensive for purchase in foreign markets.
In other words, exporters become more
competitive in a global market. Exports are
encouraged while imports are discouraged.
As the demand for a counrty’s exported
 goods increases world wide, the price will
begin to rise, normalising the initial effect of
the devaluation and vice-versa.
2] To shrink trade deficits
Exports will increase and imports will
decrease due to exports becoming cheaper
and exports more expensive. This favors an
improved balance of payments as exports
increase and imports decrease, shrinking
trade deficits. President deficit are not
uncommon today, with the United States and
many other nations running president
imbalances year after year.
3] To reduce sovereign debt burdens
A government may be incentivized to
encourage a weak currency policy if it has a
lot of government-issued sovereign debt to
service on a regular basis. If debt payments
are fixed, a weaker currency makes these
payments effectively less expensive over
time.
3] When and how it started?
The first currency war started in the 1930’s.
Before world war 1 erupted, the value of
most major currencies was derived from the
price of gold. Countries pegged their currency
to the metal as this was known as ‘The Gold
Standard’. However, countries needed to
print more money to fund the staggering
costs of the war.
The gold standards provide stability in foreign
exchange markets, but it also provide limited
flexibility to governments. This promoted the
countries to abandon the gold standard to
help manage the huge financial burden of the
war, but once it was over most of them
craved the relative stability, it brought and
tried to return to it.
4] Historical Overview
❖ Up to 1930
For millennia, going back to at least
the Classical period, governments have often
devalued their currency by reducing
its intrinsic value. Methods have included
reducing the percentage of gold in coins, or
substituting less precious metals for gold.
However, until the 19th century, the
proportion of the world's trade that occurred
between nations was very low, so exchanges
rates were not generally a matter of great
concern.
❖ Currency war in the Great Depression
During the Great Depression of the 1930s,
most countries abandoned the gold standard.
With widespread high unemployment,
devaluations became common, a policy that
has frequently been described as "beggar thy
neighbour", in which countries purportedly
compete to export unemployment. However,
because the effects of a devaluation would
soon be offset by a corresponding
devaluation and in many cases retaliatory
tariffs or other barriers by trading partners,
few nations would gain an enduring
advantage.
❖ 1973 to 2000
While some of the conditions to allow a
currency war were in place at various points
throughout this period, countries generally
had contrasting priorities and at no point
were there enough states simultaneously
wanting to devalue for a currency war to
break out. On several occasions countries
were desperately attempting not to cause a
devaluation but to prevent one. So states
were striving not against other countries but
against market forces that were exerting
undesirable downwards pressure on their
currencies. Examples include The United
Kingdom during Black Wednesday and various
tiger economies during the Asian crises of
1997.
❖ Competitive devaluation after 2009
As the world's leading Reserve currency, the
US dollar was central to the 2010–2011
outbreak of currency war.
By 2009 some of the conditions required for a
currency war had returned, with a severe
economic downturn seeing global trade in
that year decline by about 12%. There was a
widespread concern among advanced
economies about the size of their deficits;
they increasingly joined emerging economies
in viewing export led growth as their ideal
strategy. In March 2009, even before
international co-operation reached its peak
with the 2009 G-20 London Summit,
economist Ted Truman became one of the
first to warn of the dangers of competitive
devaluation. He also coined the
phrase “competitive non-appreciation”.
❖ Currency war in 2013
In mid January 2013, Japan's central bank
signalled the intention to launch an open
ended bond buying programme which would
likely devalue the yen. This resulted in short
lived but intense period of alarm about the
risk of a possible fresh round of currency war.
❖ Currency war in 2015
 In August 2015, China devalued the yuan
by just under 3%, partially due to a
weakening export figures of −8.3% in the
previous month. The drop in export is
caused by the loss of competitiveness
against other major export countries
including Japan and Germany, where the
currency had been drastically devalued
during the previous quantitative easing
operations. It sparked a new round of
devaluation among Asian currencies,
including the Vietnam dong and the
Kazakhstan tenge.
5] Impact of currency war on economies
If a country is successful in a currency war, its
exports will be cheaper, and imports will be
minimised. This would improve the trade
balance. If the interest rates were lowered to
devalue its currency, it might have the effect of
spurring economic growth. It should be noted
that there is always a risk that the country
would end up with high import costs. Higher
import costs can lead to higher inflation
If a country loses out in a currency war, its
exports will become more expensive, and
imports will become cheaper. This can affect
the trade balance and the domestic industries.

❖ How do it impact investors?

When a country’s currency is devalued, the
value of returns for overseas investors might
drop. This expectation itself might lead
overseas investors to pull out. The outflow of
capital can lower asset prices.
When a country’s currency is expected to
appreciate, the value of returns for overseas
investors might increase. This expectation
might lead to an inflow of investments from
overseas investors. The inflow of capital can
boost asset prices.
6] Are we in a currency war?
The situation in 2022 is different from that of
2010. In 2022, countries want to curb inflation
but also want to avoid or delay hurting
domestic industries through higher borrowing
costs.
One of the measures used by central banks to
curb inflation is raising interest rates, as it
lowers spending. Just like lowering interest
rates can depreciate a currency, hiking interest
rates can appreciate a currency.
How?
Appreciation of a currency might be favourable
for countries dependent on imports for key
materials like crude oil, which has been quite
volatile over the past few years. However,
rising interest rates would hurt domestic
industries. This can also have an effect on
international capital flows.
7] Is currency war still going on?
No, currently currency war is not been fought
but in 2022 we came to close to the currency
war when Russia devalued it’s currency due
to which some more countries devalued their
currency after a month everything became
normal and war didn’t happen.
8] The Pre-COVID-19 Situation
The dollar surged in the years before the
COVID-19 pandemic primarily because the
U.S. was the first major nation to unwind its
monetary stimulus program, after being the
first one out of the gate to introduce QE.
The long lead-time enabled the U.S. economy
to respond positively to the Federal Reserve's
successive rounds of QE programs.
Other global powerhouses like Japan and the
European Union were relatively late to the QE
party. Canada, Australia, and India, which had
raised interest rates soon after the end of the
Great Recession of 2007-09, had to
subsequently ease its monetary policy
because growth momentum slowed.
9] International conditions required for
currency war
For a widespread currency war to occur a
large proportion of significant economies
must wish to devalue their currencies at once.
This has so far only happened during a global
economic downturn.
An individual currency devaluation has to
involve a corresponding rise in value for at
least one other currency. The corresponding
rise will generally be spread across all other
currencies[20] and so unless the devaluing
country has a huge economy and is
substantially devaluing, the offsetting rise for
any individual currency will tend to be small
or even negligible. In normal times other
countries are often content to accept a small
rise in the value of their own currency or at
worst be indifferent to it. However, if much of
the world is suffering from a recession, from
low growth or are pursuing strategies which
depend on a favourable balance of payments,
then nations can begin competing with each
other to devalue. In such conditions, once a
small number of countries begin intervening
this can trigger corresponding interventions
from others as they strive to prevent further
deterioration in their export competitiveness.
10] Policy Divergence
While the U.S. implemented its strong dollar
policy, the rest of the world largely pursued
easier monetary policies. This divergence in
monetary policy is the major reason why the
dollar continued to appreciate across the
board.
The situation was exacerbated by a number
of factors:
• Economic growth in most regions was
below historical norms; many experts
attributed this sub-par growth to fallout
from the Great Recession.
 • Most nations exhausted all other options
to stimulate growth, with interest rates at
historic lows. With no further rate cuts
possible and fiscal stimulus not a
controversial option, currency
depreciation was the only tool remaining
to boost economic growth.
• Sovereign bond yields for short-term to
medium-term maturities had turned
negative for a number of nations. In this
extremely low-yield environment, U.S.
Treasuries attracted a great deal of
interest, leading to more dollar demand.
11] The U.S. Strong Dollar Policy
The U.S. has generally pursued a "strong
dollar" policy for many years with varying
degrees of success. The U.S. economy
withstood the effects of a stronger dollar
without too many problems, although one
notable issue is the damage that a strong
dollar causes to the earnings of American
expatriate workers.
However, the U.S. situation is unique. It is the
world's largest economy and the U.S. dollar is
the global reserve currency. The strong dollar
increases the attractiveness of the U.S. as a
destination for foreign direct investment
(FDI) and foreign portfolio investment (FPI).
Not surprisingly, the U.S. is a premier
destination in both categories. The U.S. is also
less reliant on exports than most other
nations for economic growth because of its
giant consumer market, by far the biggest in
the world.
12] What Do Countries Try to Achieve in
a Currency War?
A country devalues its currency in order to
decrease its trade deficit. The goods it
exports become cheaper, so sales rise.
The goods it imports become more
expensive, so their sales decline in favor
of domestic products. The end result is a
better trade balance.
The problem is, other nations may
respond by devaluing their own
currencies or imposing tariffs and other
barriers to trade. The advantage is lost.
13] Quantitative easing
Quantitative easing (QE) is the practice in
which a central bank tries to mitigate a
potential or actual recession by increasing
the money supply for its domestic economy.
This can be done by printing money and
injecting it into the domestic economy
via open market operations. There may be a
promise to destroy any newly created money
once the economy improves in order to avoid
inflation.
Quantitative easing was widely used as a
response to the financial crises that began in
2007, especially by the United States and the
United Kingdom, and, to a lesser extent,
the Eurozone. The Bank of Japan was the first
central bank to claim to have used such a
policy.
Although the U.S. administration has denied
that devaluing their currency was part of their
objectives for implementing quantitative
easing, the practice can act to devalue a
country's currency in two indirect ways.
Firstly, it can encourage speculators to bet
that the currency will decline in value.
Secondly, the large increase in the domestic
money supply will lower domestic interest
rates, often they will become much lower
than interest rates in countries not practising
quantitative easing.
14] Mechanism for devaluation
A state wishing to devalue, or at least check
the appreciation of its currency, must work
within the constraints of the
prevailing International monetary system.
During the 1930s, countries had relatively
more direct control over their exchange rates
through the actions of their central banks
15] Negative Effects of a Currency War
Currency depreciation is not a panacea for all
economic problems. Brazil is a case in point.
The country's attempts to stave off its
economic problems by devaluing the Brazilian
real created hyperinflation and destroyed the
nation's domestic economy.
So what are the negative effects of a currency
war? Currency devaluation may lower
productivity in the long term since imports of
capital equipment and machinery become
too expensive for local businesses. If currency
depreciation is not accompanied by genuine
structural reforms, productivity will
eventually suffer.
Among the hazards:
• The degree of currency depreciation may
be greater than what is desired, which
may cause rising inflation and capital
outflows.
• Devaluation may lead to demands for
greater protectionism and the erection of
 trade barriers, which would impede global
trade.
• Devaluation can increase the currency's
volatility in the markets, which in turn
leads to higher hedging costs for
companies and even a decline in foreign
investment.
16] Does Currency Affect Trade Wars ?
It may be the reverse: A trade war damages
the currency of the country it targets.
The United States has an enormous trade
gap with China. In January 2024, the U.S.
imported more than $35 billion worth of
goods from China and exported nearly $12
billion.
In 2020, then-President Donald Trump tried
to adjust that imbalance by imposing a raft of
tariffs on Chinese goods entering the U.S. This
protectionist policy was aimed at increasing
the prices of Chinese goods and therefore
making them less attractive to U.S. buyers.
One effect was an apparent shift in U.S.
manufacturing orders from China to other
Asian nations such as Vietnam. Another effect
was a weakening of the Chinese currency, the
renminbi. Less demand for Chinese products
led to less demand for the Chinese currency.
17] What Harm Can a Currency War
Do?
A currency devaluation, deliberate or not, can
damage a nation's economy by causing
inflation. If its imports rise in price and it
cannot replace those imports with locally
sourced products, the country's consumers
simply get stuck with the bill for higher-priced
products.
A currency devaluation becomes a currency
war when other countries respond with their
own devaluations, or with protectionist
policies that have a similar effect on prices.
By forcing up prices on imports, each
participating country may be worsening their
trade imbalances instead of improving them.
18] Is India in currency war?
India has not experienced currency wars, we
came dangerously near in September 2015
when China purposefully devalued yuan. As a
result, most emerging markets have devalued
their currencies in order to remain
competitive in terms of export. India had no
choice but to allow the INR to fall.
19] Does it affect the strength of currency?
Yes, currency war does affect the strength of
a currency. The other name for currency war
is ‘competitive devaluation’ which means to
lower down the value of currency or to lower
down the exchange rate of the currency.
When the currency is devalued the strength
of it is reduced against the other country’s
currency.
20] Does the step towards the de-
dollarisation will take us into a currency war
in future?
De-dollarisation means a process of moving
away from the reliance on the U.S dollar(USD)
as the chief reserve currency. Recently, Russia
has made an agreement with many countries
including China, Iran and India to trade in
local currencies instead of US dollar. This may
lead to currency war as the trade between
these countries will increase which will affect
other countries like US, UK etc. so, they may
devalue their currency to attract the countries
to trade with them.
21] Does the currency war will take a new
turn in future?
Yes, it may take a new turn in future as now
the countries are not devaluing their currency
instead they are allowing other countries to
deal in their local currency, like Russia, this
will impact on the trade of other countries
like US and UK and these countries will also
allow to trade in local currencies which may
take a form of currency war.
22] Does the Israel-Hamas war affect
currency war?
The conflict between Israel and Hamas is not
affecting India’s trade with Israel
immediately. India’s 1.8% merchandise
exports to Israel are mostly petroleum
products. Israel imports $5.5-6 billion in
refined hydrocarbons from India. India’s
exports to Israel were $8.4 billion in FY-2023.
High crude oil prices hurt India impacting
currency stability making imports expensive,
possibly worsening the government’s fiscal
deficit, widening the CAD further impacting
currency adversely and affecting the profit
margins of sectors such as aviation, paints,
tyres and chemicals.
22] Does the Russia-Ukraine war affect
currency war?
The war between Russia-Ukraine adversely
affected global currencies. However,
European currencies, particularly the Russian
rouble, Czech koruna and Polish zloty
currencies, depreciated against the USD,
Pacific currencies appreciated significantly.
Due to the financial and economic sanction
imposed on Russia, as well as Poland and the
Czech Republic’s proximity to the war zone,
their currencies have weakened significantly
against the USD. Furthermore, the Russian
Central Bank’s announcement has had a
significant positive impact on pan-American,
European, particularly the Russian rouble and
Polish zloty currencies. These have significant
implications for investors, portfolio managers
and researchers.