Currency wars

Source: Internet

By Naveed Qazi | Editor, Globe Up Front

Currency wars are back. United States Dollar, which was widely regarded as the reserve currency of the world is losing its faith value. 

There was a time when every country wanted to have substantial dollar reserves in order to stay competent during the purchases in the commodity market. Ever since the G20 meeting happened in Seoul last year, currency wars have again started to set ablaze in an untimely political debate, directly related to the future of United States Dollar.
The policy of United States, in order to rebalance the world economy, is that it wants the emerging economies, especially export driven economies like China to appreciate their currencies. Fed Reserve, on the other hand, is under a Quantitative Easing process – increase of the money supply and dispatching it to financial institutions through buying government or corporate bonds in order to create liquidity and more lending. The idea behind this expansionary monetary policy is that the United States now likely wants to rely more on exports. It wants to increase the productively of the manufacturing sector. But the QE policy, due to an increased US dollar supply will further devalue its currency, due to surplus supply of money, which will have even worse consequences in the world commodity market, as US Dollar is the world’s trading currency. If it’s not the United States, then who is the guardian of our world commodity trade?
The United States of America has also been pressing China to appreciate the value of its currency, ever since last year. China, currently, buys a lot of US debt. It is giving solicit loans to Euro-zone, and is therefore regarded as a pivotal player to rebalance the world economy. It has relied on export driven economic principles for decades. In 1992, Chinese government decided to put forward an autonomy regulation for state enterprises. It not only allowed free market mechanisms enter Chinese market, but it also allowed the state industries to mass produce in order to boost exports. The result was massive Foreign Direct Investment due to low cost labour, and phenomenal export sales, helping the balance of payments, which induced China to have a relatively high sustained GDP growth for two decades. But all this came at a price: the Chinese Yuan was pegged against the dollar at a fixed value.
China is backed by Brazil and other countries to keep its currency devalued. Euro Zone, in both psychological and financial perspectives of the investors, is weak on capital inflows right now. This year, G20 debate highlighted Japan and Switzerland as safe havens for investments, other than China. Conversely, it was United States where every country or investor wanted to invest. Economic circumstances of today are suggesting fluctuations in the economic power structures.
The currency wars are making an impact on the political relationships of giant economies. China, over the years, has been reluctant to appreciate Yuan because not only it will make its massive foreign currency reserves of US dollars’ worth even less, but it will also significantly reduce the surplus sales of its exports, thereby lowering down the growth of economy. This phenomenon will also apply to every emerging export driven economy – why would countries appreciate the value of the currencies or devalue their foreign reserves to the extent that would affect their export strategies and commodity buying? A country has to overhaul its economic and political institutions in order to re-structure its import and export industrial sectors, if any currency appreciation takes place.
So how will the currency wars continue? And if by any chance China chose to stop buying US debt, it will affect the capital flow in the US economy, constructing a direr situation. It will make it even harder for businesses to sustain. It will raise interest rates and commodity prices. And if China starts selling US debt, especially government bonds, then it would completely remove money from US economy.
There is this issue of disparity between currencies which sustains currency wars between the economies. In the global economy, the US dollar had much more buying power than the Yuan. This made U.S. goods more expensive to export to foreign nations, than currencies of emerging economies. As such, China's prices for manufactured goods have been far more competitive than those of the U.S. If United States prefers to drive export policies, it needs to create an economic environ which would allow them to do so. United States seriously needs to harmonise its currency to desirable exchange levels.


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