The term “currency war” was first used by the Executive Director of the International Monetary Fund and the Minister of Finance of Brazil. Mr. Strauss-Kahn of the IMF had admitted that there are indications that some countries try to use their currencies as a “weapon”. On his part, Mr. Guido Mantega, Finance Minister of Brazil, said that competitive devaluations by developed countries will lead to a new trade war. “We’re in the middle of a currency war that threatens us, and undermine our competitiveness”, stated Mr. Mantega at meeting with top officials.
The tactics of China to manipulate its national currency, reducing the fluctuations against the forex trading prices of the dollar, is one of the main reasons that caused the currency exchange war. The U.S. has been complaining that the depreciation of the forex rates of the Yuan is costing thousands of jobs in the country.
But there are many who blame the Americans as well: In recent months, the forex trading price of the dollar has lost considerable ground, as interest rates are low, thus investors seeking higher returns in emerging economies. The influx of investment capital to emerging pushes up the value of their currencies against the USD. This trend is exacerbated by the new quantitative easing measures that will be applied by the Fed.
The weak USD favors the competitiveness of U.S. exports. The U.S. has large trade deficit, thus increasing export activity will help to reduce it. Some argue that the Fed measures aim to a further weakening of the dollar which will contribute to the recovery of the U.S. economy through exports.
Apart from the confrontation regarding the currency war between China and the U.S., there is also the element of the emerging economies and some developed ones. Brazil and Thailand have used fiscal measures to control the inflow of speculative capital. Japan, South Korea and other countries have intervened in currency markets in an effort to limit the growth of their national currencies.
The term Currency War is connected with the issue of financial imbalances in the world. Some countries have large trade surpluses – mainly China, Germany, Saudi Arabia and Russia. On the other hand, U.S. shows a large trade deficit. The international imbalances reflect the borrowing levels of the governments. These countries want to sell more goods abroad in order to bring in revenue which will help fight the deficits.