Currency Wars – What Are They And How Do They Work?

February 18, 2022

Something that few of us truly grasp is the power that a nations’ currency can have on its ability to trade to the global market and the impact which it makes on the economy on the whole. Governments around the world invest a huge amount of time in the value of their own currency and this will often lead to what is known as currency wars. You may have seen the impact which a currency rate has on you personally if you have been on vacation or you transfer cash using something like Ria Money Transfer. This of course is on a small scale but it can help to grasp just how quickly the value of a coin can change.

On a big scale, this means so much more, which is why we often see these wars taking place.

What Is a Currency War?

In basic terms, a currency war is what happens when two or more countries are locked in a battle to improve their own competitiveness when it comes to foreign trade. What each nation will try and do is devalue its own currency in order to increase the attractiveness of its exports. The other nation or nations involved will also be trying to do the same, for the same reasons, and usually for the same kind of exports.

Sounds Dangerous 

Whilst these wars are going all the time, there are often some unintended consequences of a currency war, and devaluing a nation’s own currency. When this strategy is not implemented well, we can see rising levels of inflation in the country with the devalued currency. Inflation impacts all aspects of life in a country from food costs to travel. The idea of a perfect strategy in a currency war is certainly not to pass on the burden to the nation’s consumers.

Benefits of a Currency War 

When massaging a currency like this in order for it to devalue, there are clear goals in sight. The first of those is, as discussed, to make their exports appeal more on the foreign market, given the lower cost. Additionally, this makes imports much more expensive which then puts a great focus on home-grown products. This latter benefit is one that politicians love to use in order to drum up support amongst producers from their own country, assuming that they can avoid the risk of inflation.

General Consensus 

Most economists agree that this is a very dangerous strategy for countries to employ, because of the impact which it has on the global economy. Often these experts will point towards the trade barriers which are often born from these currency wars, which can have a negative impact in the future between two or more nations.

The majority of these wars take place covertly, and only insiders will really know what is going on. There is however a very small window before finance experts understand what is going on, and once word gets out, the value of the currency cannot be devalued for long, owing to the way that investors and funds will then behave.

In terms of whether or not these work for the country which chooses to devalue its currency, results have varied, but in the main, it is a short-term solution for increasing exports.


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