Currency Wars Explained

Currency Wars Explained

Currency wars are said to occur when countries seek to devalue their currency to gain a competitive advantage. However, if one country seeks to become more competitive through devaluation, it means other countries become less competitive. Therefore, they may respond by weakening their currency too. Thus, we may get a situation of competitive devaluation where each country seeks to reduce value of currency. This can lead to instability.

Why do countries want a weaker currency?

If you devalue your currency, it means your exports are relatively more competitive (cheaper to foreigners). Therefore you will export more. Also imports become more expensive so there should be a rise in Aggregate Demand. This should help boost economic growth and reduce unemployment.