Russia’s Central Bank has warned that the world’s leading economies are on the brink of a ‘currency war’ as they try and keep up with Japan and use devaluation in an effort to boost their competitiveness.
A currency war is also known as competitive devaluation and is a condition in international affairs that sees countries compete against each other to achieve a lower exchange rate for their own currency.
Deputy Chairman of Bank Rossii Alexei Ulyukayev told a press conference in Moscow; “Japan is weakening the Yen and other countries may follow.”
As the price to buy a currency falls so too does the real price of exports from the country. This gives the country the advantage of boosting domestic industry and has the potential to increase jobs. This is the aim of the Japanese, whose new leader Prime Minister Shinzo Abe has vowed to kick-start the Asian nations slow economic recovery.
Such action however comes at a price. As the value of exports decrease the cost of imports rise and often has the negative impact of reducing citizens purchasing power. Like in a conventional war this action is often met with retaliation from other nations.
The Yen has hit yearly lows against most of the major currencies, hitting its lowest level in two years against the US Dollar and a twenty-month low against the Euro.
Reprisals could be enacted soon after Luxembourg Prime Minister Jean-Claude Juncker, who leads the Euro-area finance ministers said that the Euro’s exchange rate is ‘dangerously high’. With the global economic recovery tenuous at best all of the major economies will try and give their respective nations a boost and could follow Japans lead.
A good example of a currency war from recent times is the argument that occurred between the United States and China. The global economic crisis has also resulted in several other countries’ taking steps that could potentially lead to a large scale currency conflict. Devaluation can make interest payments on international debt more expensive if those debts are denominated in a foreign currency, and it can discourage foreign investors.
The common outcome of currency war is a weakening in international trade and protests from foreign powers or the nation in questions own citizens. The pieces are in place for a widespread currency war; for the sake of the global economic recovery let’s hope that all sides take a step back from the brink.
The Pound to Euro exchange rate is currently trading at 1.2044
The Pound to US Dollar exchange rate is currently trading at 1.6036
The Pound to Australian Dollar exchange rate is currently trading at 1.5194
The Euro to US Dollar exchange rate is currently trading at 1.3307
The Euro to Pound exchange rate is currently trading at 0.8298
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