Is there a currency war ravaging the FX landscape? Is monetary easing a hostile act? Brazil’s finance minister Guido Mantega first coined the ‘currency war’ term in 2010, alerting the world to the dangers of competitive devaluation. Currency war, also known as competitive devaluation, is a condition in international affairs where countries compete against each other to achieve a relatively low exchange rate for their own currency. As the price to buy a particular currency falls so too does the real price of exports from the country. Imports become more expensive. So domestic industry, and thus employment, receives a boost in demand from both domestic and foreign markets.
However, the price increase for imports can harm citizens’ purchasing power. The policy can also trigger retaliatory action by other countries which in turn can lead to a general decline in international trade, harming all countries.The Dollar, the Brazilian Real, the Euro…will the currency war benefit these currencies or does it actually lead to the destruction of their economies? Countries with low interest rates have little ammunition left to fight the war. Will the financial weapon of quantitative easing offer a solution or is it a curse? Share your views, join the #FXdebates. Check out this engaging infographic from Saxo Bank.