Economics Project: Currency War – Reasons

and Repercussions

1. Title Page
CBSE Economics Project 2025
Topic: Currency War – Reasons and Repercussions
Student Name: Ishaan Babbar
Class: XII-B
School: Jain International Residential School

2. Certificate Page
This is to certify that Ishaan Babbar, a student of Class XII-B at Jain International Residential
School, has successfully completed the Economics Project titled “Currency War – Reasons
and Repercussions” for the academic year 2024–2025 under the guidance of our Economics
faculty.

Signature of Student: ____________

Signature of Teacher: ____________
Date: __ / __ / 2025

3. Acknowledgement
I would like to express my sincere gratitude to my Economics teacher for guiding me through
this project. I also thank my school and classmates for their encouragement and support. Special
thanks to sources like RBI, IMF, and World Bank for providing reliable data and information
that helped me understand the complex topic of currency wars.

4. Index
1. Introduction
2. Objectives
3. Methodology
 4. Meaning of Currency War
5. History of Currency Wars
6. Reasons Behind Currency Wars
7. Economic Theories Related to Currency War
8. Global Examples
9. US-China Trade & Currency Conflict
10. Japan’s Devaluation Strategy
11. Eurozone and Competitive Devaluation
12. Emerging Markets and Impact
13. Effects on Global Trade
14. Effects on Financial Markets
15. Effects on Inflation and Growth
16. Effects on Developing Economies
17. Case Study: Impact on India
18. Role of RBI and India’s Exchange Policy
19. Currency War and Global Institutions
20. Solutions and Policy Suggestions
21. Future Outlook
22. Conclusion
23. Bibliography
24. Appendix

5. Introduction (1.5 pages)

Currency war, also known as competitive devaluation, refers to a situation where countries
compete against each other to achieve a relatively lower exchange rate for their currency. This is
usually done to boost exports by making goods and services cheaper in the international market.
While this may benefit a country’s economy temporarily, it can have significant long-term
repercussions on global trade, inflation, investment, and diplomatic relationships.

This project explores the historical context, underlying reasons, economic theories, case studies,
and the broader implications of currency wars. As globalization deepens and economies become
more interconnected, currency manipulation becomes a powerful yet dangerous tool in a
country’s economic policy arsenal.

6. Objectives (1 page)
The objectives of this study are as follows:

1. To define and understand the concept of currency wars.

2. To explore the historical development of currency devaluation tactics.
3. To identify key economic and political motivations behind currency wars.
 4. To analyze real-world examples of currency conflicts.
5. To evaluate the impact of currency wars on trade, inflation, investment, and economic
growth.
6. To examine India’s position in a globally competitive currency environment.
7. To suggest policy measures to manage the impact of currency wars.

7. Methodology (1 page)
The methodology of this project is based on secondary data collection. Research materials were
sourced from:

 IMF & World Bank Reports

 RBI publications and bulletins
 Financial newspapers (The Hindu Business Line, Economic Times)
 Government of India policy documents
 Economic journals and academic papers
 Verified online sources (Investopedia, TradingEconomics, Statista)

Data was compiled, categorized, and analyzed using graphical tools and supported by real-time
examples.

8. Meaning of Currency War (1.5 pages)

A currency war arises when nations deliberately manipulate the value of their currencies to gain
a trade advantage. Lowering the exchange rate of a currency makes a country’s goods cheaper
abroad, increasing exports and reducing trade deficits. However, such devaluation often invites
retaliation from other countries, leading to a downward spiral of competitive devaluations.

This concept is not new. It first became prominent during the Great Depression (1930s) and re-
emerged after the 2008 global financial crisis. Today, currency wars are considered a form of
economic nationalism, often clashing with the principles of free trade.

9. History of Currency Wars (2 pages)

1930s – The First Currency War

 The Great Depression saw countries like the US and Britain abandoning the gold
standard to devalue their currencies.
 “Beggar-thy-neighbor” policies worsened global economic conditions.
1970s–80s – Post-Bretton Woods Adjustments

 Collapse of fixed exchange rate system in 1971.

 Volatile currency markets emerged; countries used interest rate policies to influence
exchange rates.

2000s–2010s – Rise of China and US Dollar Dominance

 China kept the yuan undervalued to boost exports, leading to US criticism.

 Japan’s “Abenomics” policies led to a weaker yen.

Post-2008 – Modern Currency Wars

 Major central banks initiated Quantitative Easing (QE).

 Brazil’s finance minister labeled it a “currency war” in 2010.

10. Reasons Behind Currency Wars (2 pages)

1. Trade Surplus Goals

 Countries try to boost exports to reduce trade deficits and generate surplus.

2. Economic Recovery

 During recessions, devalued currencies help stimulate economic activity.

3. Controlling Inflation

 A weak currency can import inflation by raising import costs—sometimes intentional.

4. Responding to Global Trends

 If a country’s trade rivals devalue their currencies, others follow to remain competitive.

5. Domestic Political Pressures

 Governments may use currency depreciation as a tool to fulfill growth promises.

11. Economic Theories Related to Currency War (1.5 pages)

  Purchasing Power Parity (PPP): Long-term exchange rate should equalize price levels
between countries.
 Balance of Payments Theory: Currency value reflects a country’s balance of trade and
capital flows.
 Keynesian Approach: Devaluation boosts demand by increasing net exports.
 Mundell-Fleming Model: Demonstrates effectiveness of exchange rate policy in open
economies.

12. Global Examples (2 pages)

China

 Pegged yuan to the US dollar for years.

 Accused of keeping it undervalued to boost manufacturing.

United States

 Quantitative Easing weakened the dollar post-2008.

 Accused of starting a new currency war by emerging markets.

Japan

 Abenomics (2012): Aggressive monetary easing led to a weaker yen.

Switzerland

 Pegged Swiss franc to euro (2011–2015) to protect exporters.

13. Effects of Currency Wars (2 pages)

On Global Trade

 Short-term export benefits.

 Long-term instability in trade relations.

On Financial Markets

 Sudden capital outflows from emerging markets.

 Volatility in forex and stock markets.
On Inflation/Deflation

 Import costs rise → inflationary pressure.

 Export-led economies can face deflation if retaliation reduces demand.

On Multilateral Relations

 Trust erosion in global trade norms.

 Accusations of currency manipulation.

14. Case Study: India (2 pages)

 India doesn’t actively participate in currency wars.
 The rupee is partially convertible and market-driven, but RBI intervenes.
 Currency depreciation affects:
o Oil import costs (India is oil-import dependent)
o Inflation
o Foreign capital flow (especially in equity markets)
o Export competitiveness (especially in IT, pharma, textiles)

15. Role of RBI (1 page)

 Maintains exchange rate stability via forex reserves.
 Intervenes during rupee volatility to prevent inflation and capital flight.
 Uses tools like Open Market Operations and repo rate adjustments.

16. Currency War and Global Institutions (1 page)

 IMF discourages competitive devaluations.
 WTO promotes fair trade practices.
 G-20 platforms used for dialogue and resolution.
 Enforcement remains weak due to national sovereignty over monetary policy.

17. Policy Solutions & Recommendations (1 page)

 Focus on structural reforms over devaluation.
  Encourage multilateral cooperation.
 Develop currency swap agreements.
 Promote domestic production and innovation.

18. Future Outlook (1 page)

 With increasing geopolitical tensions, currency wars may become more frequent.
 The role of digital currencies (like e-₹ and e-CNY) could add complexity.
 Central banks must balance growth, inflation, and exchange rate policies cautiously.

19. Conclusion (1 page)

Currency wars are a powerful yet risky economic tool. Though they offer a temporary export
boost, the long-term costs—global tensions, inflation, and market instability—are immense. A
responsible monetary policy, global cooperation, and transparent governance are key to ensuring
sustainable economic growth.

20. Bibliography
 www.imf.org
 www.rbi.org.in
 www.worldbank.org
 The Hindu Business Line
 Economic Times
 Investopedia
 TradingEconomics
 NBER Working Papers

21. Appendix
 Graphs of USD-INR, USD-CNY, etc.
 Trade balance charts
 RBI Forex intervention data
Here's a slightly more expanded and refined version of key sections to ensure the project
reaches the full 25-page handwritten requirement while maintaining flow, sophistication, and
in-depth clarity.

Expanded Content in Selected Sections

🔹 5. Introduction (2 full pages)

A currency war, also referred to as a "competitive devaluation," is a situation in international

economics where countries deliberately lower the value of their national currency to gain an edge
in global trade. When a currency depreciates, the country’s exports become cheaper and more
attractive to foreign buyers, thereby potentially increasing demand for domestically produced
goods and services. Conversely, imports become more expensive, which encourages consumers
to prefer locally made products.

However, this strategy often provokes retaliatory devaluations by competing economies. If

several countries devalue their currencies simultaneously, it leads to exchange rate volatility,
increased global inflation, and reduced investor confidence.

Currency wars not only challenge the principles of free trade but also strain multilateral
economic cooperation. They are not merely technical economic adjustments but reflect deeper
political, strategic, and systemic responses to global economic pressures.

In today’s era, dominated by trade protectionism, digital currencies, and geopolitical

polarization, the currency war debate becomes even more significant.

🔹 6. Objectives (1.5 pages)

The objectives of this project are structured to enable comprehensive understanding and critical
assessment of currency wars. These are:

1. To clearly define and explain the concept of a currency war in the context of global
economic policy.
2. To investigate the root causes that prompt nations to engage in competitive devaluation.
3. To examine the economic frameworks and theories that relate to currency valuation.
4. To evaluate historical and contemporary examples of currency conflicts and the policy
tools used.
5. To understand how currency wars impact trade, inflation, growth, and diplomatic
relations between countries.
 6. To specifically study the impact on India, including how the RBI’s exchange rate
management shields the economy.
7. To propose policy measures and solutions that can prevent harmful currency competition
and promote cooperative monetary policy.
8. To enrich students' understanding of macroeconomic management in a globally
interconnected economy.

🔹 9. History of Currency Wars (2.5 pages)

🔸 The Great Depression & 1930s Devaluation Race

The 1930s represent the earliest large-scale currency war. After the Wall Street Crash of 1929
and the onset of the Great Depression, global demand plummeted. To cope, countries began
devaluing their currencies after abandoning the gold standard. The UK was among the first,
followed by the US and France. The idea was to make exports cheaper and drive recovery.

However, this triggered a "race to the bottom", where retaliatory devaluations damaged
international trade even more. The absence of a coordinated policy framework worsened global
tensions and deepened the depression.

🔸 Bretton Woods System & Post-1971 Floating Exchange Rates

Post-World War II, the Bretton Woods system pegged global currencies to the US dollar, which
was linked to gold. When the US abandoned the gold standard in 1971, floating exchange rates
emerged. This made currency manipulation easier and frequent.

🔸 The Plaza Accord (1985)

A rare moment of coordinated devaluation happened when the G-5 nations (US, UK, France,
Germany, and Japan) agreed to depreciate the US dollar to address the trade imbalance,
especially the US trade deficit with Japan and West Germany.

🔸 2008 Crisis and the Modern Era

After the 2008 global financial meltdown, countries like the US, Japan, and China adopted
expansionary monetary policies to support domestic economies. Critics argue that
Quantitative Easing (QE) by the US Federal Reserve sparked a modern currency war, as it
weakened the dollar, making US exports more competitive but affecting capital flows to
developing nations.

🔹 12. Global Examples (Expanded to 2.5 pages)

🔸 China’s Yuan Strategy

China has historically kept its yuan undervalued to maintain its status as the world's factory. For
years, the yuan was pegged to the US dollar, allowing China to accumulate massive trade
surpluses. The US has repeatedly accused China of being a “currency manipulator.” China’s
tightly controlled exchange rate policy has been a cornerstone of its export-led growth strategy.

🔸 United States: QE and the Dollar

The US does not directly manipulate its currency, but its actions, such as interest rate changes
and quantitative easing, have profound impacts. When the Fed buys assets and pumps dollars
into the economy, the dollar weakens. This supports exports but causes capital outflows from
emerging markets.

🔸 Japan: Abenomics

Under Prime Minister Shinzo Abe, Japan used a three-arrow strategy to boost growth: monetary
easing, fiscal stimulus, and structural reforms. The Bank of Japan introduced negative interest
rates and massive bond purchases. This devalued the yen, boosting Japanese exports, but drew
criticism from G-20 nations.

🔸 Switzerland & Euro Peg

In 2011, Switzerland pegged the Swiss franc to the euro to protect exporters during eurozone
turmoil. This policy was abandoned in 2015, creating one of the most volatile moments in forex
history, with the franc rising by 30% overnight.

🔹 14. Case Study: India (Expanded to 2.5 pages)

India is generally not seen as a participant in active currency manipulation. However, global
currency volatility significantly impacts India due to its open trade and financial sectors.

Key Effects:

1. Imports and Inflation: A weaker rupee increases the cost of imported goods,
particularly crude oil, gold, and electronics, leading to inflationary pressures.
2. Export Competitiveness: A depreciated rupee benefits sectors like textiles,
pharmaceuticals, IT, and jewelry, making them more price-competitive.
3. Capital Flows: Foreign Institutional Investors (FIIs) often react to currency risk. If the
rupee is expected to fall sharply, capital outflows may occur, affecting the stock market.
4. External Debt Burden: India’s external debt is partly in foreign currencies. A weaker
rupee raises the repayment cost, straining government and corporate borrowers.
 5. Policy Measures by RBI: The Reserve Bank of India maintains a careful balance
between price stability and exchange rate stability. It intervenes in forex markets by
buying/selling dollars and adjusting interest rates to prevent excessive rupee depreciation.

India’s position reflects a strategy of controlled flexibility: allowing market forces to influence
the rupee while reserving the right to intervene when needed.

🔹 20. Policy Solutions & Recommendations (Expanded to 1.5 pages)

1. Multilateral Cooperation: Countries should work through forums like the G-20, IMF,
and WTO to adopt coordinated responses rather than unilateral currency moves.
2. Transparent Exchange Rate Policies: Central banks should declare their exchange rate
frameworks and avoid stealth interventions.
3. Regional Currency Agreements: Countries can enter swap agreements (like India’s
with Japan or UAE) to manage volatility and trade in local currencies.
4. Encouraging Domestic Demand: Instead of relying solely on exports, countries should
stimulate internal consumption and productivity.
5. Limiting Excess Liquidity: Central banks should avoid creating asset bubbles or excess
currency supply that leads to distortion.
6. Developing Forex Market Infrastructure: Countries should develop sophisticated
forex derivative markets to hedge currency risks without manipulating exchange rates.

✅ Further Expanded Sections

🔹 10. Reasons Behind Currency Wars (Expanded to 2.5 pages)

Currency wars are not always driven by the intention to harm other economies. Sometimes,
countries find themselves with limited options during economic downturns. Here are detailed
reasons:

1. Trade Imbalance Correction

Countries running large trade deficits often use currency devaluation as a way to reduce the cost
of exports and increase their attractiveness in international markets. A cheaper currency
makes imported goods expensive and exported goods cheaper, helping to correct trade
imbalances.

2. Stimulus During Recession

Devaluation can act as an economic stimulus. It boosts demand for exports, stimulates domestic
production, and can help nations pull themselves out of recessionary conditions. Many countries
resorted to this strategy after the 2008 global financial crisis.

3. Lowering Unemployment

As demand for exports increases due to favorable pricing, domestic industries expand, leading
to job creation. This political goal is especially important in countries with high unemployment
rates.

4. Monetary Policy Constraints

In economies with near-zero or negative interest rates, central banks have limited tools left.
Devaluing the currency becomes a strategy to induce inflation or boost competitiveness.

5. Geopolitical Strategy

Sometimes currency devaluation is part of a larger geopolitical strategy—to shift economic

power or retaliate against sanctions. For example, in times of geopolitical tensions, countries
may deliberately disrupt global markets through monetary tactics.

6. Preventing Deflation

Mild inflation is seen as healthy for economic growth. If a country is facing deflationary
pressure, a weaker currency can raise import prices and increase overall price levels.

🔹 13. Effects of Currency Wars (Expanded to 2.5 pages)

Currency wars can have a wide-ranging impact not just on the initiating countries but also on the
global economic system.

🔸 1. Global Trade Volatility

Unstable exchange rates cause unpredictability in trade flows. Exporters and importers face
difficulties in pricing goods and managing future contracts. This may result in lower global
trade volumes.

🔸 2. Capital Market Disturbances

Foreign Institutional Investors (FIIs) move capital rapidly in response to currency risks. This
amplifies volatility in stock markets, especially in emerging economies. Sudden currency drops
lead to capital flight, hurting investor confidence.

🔸 3. Inflation and Rising Living Costs

Currency depreciation increases the cost of imported goods like fuel, food, and machinery. This
can result in cost-push inflation, reducing purchasing power and hurting middle- and lower-
income populations.

🔸 4. Debt Servicing Pressures

Countries and companies with foreign currency-denominated debt face greater repayment
burdens if their local currency depreciates. This can affect a country’s sovereign credit rating
and increase borrowing costs.

🔸 5. Erosion of Trust in International Institutions

Currency manipulation goes against the spirit of WTO and IMF regulations. When powerful
countries engage in such practices, it undermines global rules-based order and reduces
credibility of multilateral institutions.

🔹 15. Role of RBI (Expanded to 1.5 pages)

The Reserve Bank of India (RBI) plays a critical role in managing exchange rate fluctuations
and ensuring macroeconomic stability. While the rupee is primarily market-determined, the
RBI intervenes when necessary.

🔸 1. Forex Market Intervention

RBI buys or sells US dollars in the open market to prevent sharp fluctuations in the value of
the rupee. These actions maintain investor confidence and stabilize imports/exports.

🔸 2. Maintaining Forex Reserves

India has built up substantial forex reserves (around $600+ billion in 2024) to guard against
external shocks and support the rupee in times of crisis. This acts as a buffer against sudden
capital outflows.

🔸 3. Monetary Policy Coordination

Through interest rate adjustments and repo operations, RBI influences liquidity and indirectly
affects the exchange rate. For example, raising interest rates can attract foreign capital,
strengthening the rupee.

🔸 4. Controlling Inflation

Since depreciation can cause inflation (especially via fuel imports), RBI ensures that currency
devaluation doesn’t lead to price instability, which can hurt economic growth.
🔸 5. Forward Market and Hedging Instruments

RBI facilitates the development of derivative markets like currency futures and options. This
allows businesses to hedge risks arising from exchange rate volatility.

🔹 17. Currency War and Global Institutions (Expanded to 1.5 pages)

International bodies are instrumental in detecting, resolving, and preventing currency

manipulation, but their effectiveness is often limited due to lack of enforcement power.

🔸 1. International Monetary Fund (IMF)

The IMF monitors member countries’ exchange rate policies and can issue warnings against
unfair practices. However, it has no real punitive powers to prevent large economies from
engaging in devaluation.

🔸 2. World Trade Organization (WTO)

Although the WTO focuses on trade in goods and services, currency manipulation is indirectly
connected. Countries may file disputes if they believe currency actions are a form of non-tariff
barrier.

🔸 3. G-20 Summits

G-20 nations often discuss coordinated monetary policy responses. They issue joint declarations
discouraging competitive devaluations, but follow-through is inconsistent.

🔸 4. Bilateral Currency Agreements

In some cases, countries enter into currency swap deals to bypass global systems. India, for
example, has signed rupee trade agreements with countries like Sri Lanka, UAE, and Russia.

🔹 18. Future Outlook (Expanded to 1.5 pages)

The future of currency wars will depend on how global economic powers navigate challenges
like digitization, geopolitical rivalries, and climate-related disruptions.

🔸 1. Rise of Digital Currencies

With countries launching Central Bank Digital Currencies (CBDCs) like India’s e-₹ or
China’s e-CNY, the traditional currency market might evolve. These could be used to influence
exchange rates in new ways.
🔸 2. Geopolitical Shifts

Tensions between the US, China, Russia, and the EU will likely lead to currency blocs or
alternate trading arrangements. Countries may reduce dependence on the dollar and create
regional currencies.

🔸 3. Deglobalization Trend

Nations are increasingly focusing on self-reliance (like Atmanirbhar Bharat). This may reduce
the scale of global trade but also the need for currency wars, as economies become inward-
looking.

🔸 4. Technology-Driven Forex Management

AI, blockchain, and big data will allow central banks to make faster and more precise
interventions in currency markets, potentially reducing the damage of speculative attacks.