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The effects of Currency war on the economy of countries

Consider what you read in “Currency War: Fighting to Be Weaker,” and “Swiss Franc: Is The Peg Working?” as well as what you learned from the lecture and lecture supplemental materials. Why is currency devaluation so sought after in the weak economy? Do you think there are any downsides to this tactic for countries?

Also referred to as a competitive devaluation, currency war is defined as a condition in international arena where nations seek to achieve a higher competitive advantage over others in the global markets. In their attempt to gain such advantage in trade, they make their currency exchange rate to fall relative to those of other countries. Consequently, exports become more competitive in the global arena while the imports become more expensive.

The changes in the costs of exports and imports have major effects on the domestic markets. Currency war is believed to benefit the domestic industry by increasing employment opportunities and enhancing demand for the services offered by the citizens in both the foreign and domestic markets.

The Currency war also has negative effects on the people. It is evident that such increase in the costs of imports lowers the purchasing power of the citizens. A strategy that causes imports to be overly expensive harms the international business operations in the long run. The currency war is disadvantageous to the global economy since it leads to a decline in the international trade that causes all nations to suffer.

In the historic times, cases of currency war were minimal as most countries chose to adopt and maintain a high value currency. These countries have overly allowed the forces in the market to dictate the value of their currency as opposed to relying on the currency war approach. Systems of managed exchange rates are also considered better strategies for currency valuation as opposed to the currency war strategy.

The period of great depression however, so many countries revert to the adoption of the currency war strategy to regulate their exchange rates. In their attempt to stimulate the economies, these countries relied on the currency war approach that produced more harm than the anticipated benefits. Cases of unemployment were rampant with the majority of countries having to deal with the hard economic conditions presented to the people. The results were the abashment of the currency war strategy followed with the adoption of independent currency devaluation strategy to address the situation.

As much as other approaches such as direct government interventions, capital control and quantitative easing are also used in currency devaluation, their effectiveness remains debatable. Relying on market forces to drive currency devaluation is the surest way of currency devaluation that should be adopted by different countries.