Documenti di Didattica
Documenti di Professioni
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TH
JUNE 2015
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CONTENTS
1
Introduction
Big Question:
ARE THE CURRENCY WARS BACK ON?
11
12
14
15
16
Conclusion
17
References
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INTRODUCTION
The world nowadays seems to be in a slump due to the downturn of the economy, the rising
interest rates and what is more important is about the currency exchange. The currencies play
an important role in the economy and before we go deeper, we need to define what currency
and money are all about.
MONEY
Money can be define as any good
that is widely used and accepted in
transactions involving the transfer of goods
and services from one person to another
(CliffNotes.com,
2014).
From
the
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CURRENCY
Currency can be defined as a medium of exchange for goods or services within an economy.
Currency can also be known as any form of money that is involve in the public circulation. It
includes both soft money (paper money) and hard money (coins) and it refers to be the money
that is legally designated as such by the body of the government. This currency can be seen as
fiat or attached to an underlying asset whereby the fiat money has no intrinsic value that is
backed by the credit and full faith of the issuing of the government. This type of currency is not
worth very much and most of the paper money is fiat money and we can see that the value is
actually comes from what it represents rather than what it is.
In the economy, currency plays an important role and to see how this happens, we will
see the economic advantages for the currency which are:
Medium of exchange
Store of value
Standard of value
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This allows the buyers and sellers to hastily arrive at comparative prices instead of quibbling
over how many of one good worth is compared to the others. Nevertheless, fiat money is good
for the organization that issues it. If and only if the entity defaults, the currency will become
useless.
Currency can be revaluation or devaluation which depends on the economy of the
country itself. In the fixed exchange rate system, government or monetary authority has the
decision to alter the official value of the currency whereby it is response to the unusual
pressures from the market. Currency is said to be in devaluation state when there is a
deliberate downward in terms of adjustment towards the official exchange rate which then
causes the currency to be devalued whereas revaluation is an upward change value of the
currency which is said to be good for the country as the economy is stable.
When we look upon the event of devaluation, as the government devalues its currency,
this is due to the interaction of policy decisions and market forces that causes the fixed
exchange rate of the currency to be indefensible. In order for them to sustain the fixed
exchange rate, the country needs to have reserves of the foreign exchange that is sufficient,
frequently dollars, and be willing to spend them, to purchase all offers of its currency at the
established exchange rate. When a country is unable or unwilling to do so, then it must devalue
its currency to a level that it is able and willing to support with its foreign exchange reserves.
Now, we are going to see what a currency war is and are we facing it in this year of
2015.
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Currency Volatility
The currency volatility got worse when in February 2015, the foreign exchange markets
are suddenly into mayhem due to the weakening of the Swiss, Russian, Canadian and
Australian dollar had recently dropped dramatically. This causes the hedge fund to be
close in order to avoid suffer heavy losses. The inflation rates has been in downturn as
the commodity prices are falling causes the economy to be weak and contributes to the
beginning of currency war. The sharpest volatility was in countries that were highly
reliant on commodity exports: this was primarily down to the significant shifts in global
commodity prices.
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From Figure 1, we can observe that there is a dramatically increase in the Nikkei 225 due to
the decision made by BOJ that pushed the Japanese market up as most of the investors had
shifted to the Japanese market and invest everything there. This was the QE step for BOJ to
stimulate the domestic economy and fight excessively the inflation to be in lower state. Other
than that, this may be the only way for BOJ to address Japans debt problem that occurred from
the year of 2010 as inflation corrodes the value of the bonds which makes it easier for the
government to buy back before the swelling benefit payments to Japans rapidly aging
population make that all but it is impossible.
The QE decision has forced the import prices to go up but for the Japanese exporters,
they would be very happy as they can compete by lowering the prices. The impact of this is to
export deflation to the rest of the world which causes the other countries to try to prevent this
to happen as they depend on the size of the currency move.
Figure 3: Nikkei 225 for 1 year from Jun 2014 to May 2015
Source: http://money.cnn.com/data/world_markets/nikkei225/
After few months later, Japan has recovered the stock market and from the figure
above, we can see that the stock market is on the upward trend and gives out a positive change
towards the Japans economy. This shows that the country is gaining more positive outcome
when they devalue their currency as this is the short term remedies for the hurt economy.
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Due to this, the policy makers in Asia and Europe are already devaluing their currencies,
apparently driven by the failure of low interest rates to stimulate investment and by the
recognition that the U.S. is the only place that is showing real growth. Making their exports
cheaper, they believe, will help their economies grow.
When very country devalues its currency, it becomes a problem as in the end, no one
will win. As devaluation becomes more violent and disorganized, it may create great systemic
risks all around the world. The emerging markets will need to increase dramatically their
interest rates in order to prevent the collapse of their currencies.
Due to this issue, we will discuss about the impact of BOJs decisions towards the other
countries that we are going to focus on: United States, Europe and China.
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high hope and faith towards the country. US Dollar becomes stronger for some time as the
investors were looking for a safe spot to invest in as the Dollar has lured the foreigners to invest
billions of dollars at a very low rate.
Lately, the US policymakers were not too much concerned about the strength of dollar
because the growth in US is better than Japan and Europe. Indeed, at the beginning of the year,
there was hope that US domestic demand would be strong enough this year to support GDP
growth of close to 3%, despite the stronger dollar. Lower oil prices and job creation would
boost disposable income and consumption.
However, things look different today as the US officials exchange-rate jitters are
becoming increasingly pronounced. The dollar appreciated much faster than anyone expected;
and, as data for the first quarter of 2015 suggest, the impact on net exports, inflation, and
growth has been larger and more rapid than that implied by policymakers statistical models.
Additionally, strong domestic demand has failed to emerge as the consumption growth was
weak in the first quarter along with capital spending and residential investments were even
weaker. From all of this, US has seems to be joining the currency war in order to prevent the
increment on the dollars.
EUROPE
Europe seems to be too affected by the decision that has been made by the BOJ and they need
to tolerate with the depreciation of the Yen currency because of what the Prime Minister,
Shinzo Abe effort in order to revive the Japanese economy. Europe is growing extremely slow
and with the Greek effect that has been hovering around, it gets pretty much worse. Last year,
Europe has decided to follow Japans footstep by weakening their currency.
The Euro has been depreciated against US Dollar by about 20% and this has become
good news toward the Germanys entrepreneurs. They are dreaming of weaker Euro in order to
increase their market shares and push the others into deeper deficit. Europe has been involved
with currency war when they decided to devalue their currency which most of the economist
thinks that this is due to the political and intellectual failure of the order.
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From these figures above, we can clearly observe that the Euro is weakening from time to time
and there is no sign of recovery since the decision that has been made by the BOJ. Therefore,
Europe has officially joined the currency war.
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CHINA
Will China be badly affected by this mode made by Japan? As we already know, Japan and
China are already rivals in terms of manufactured products and it is still increasingly competing.
Most of the economists predicted that China will not follow Japan and Yuan will become as
strong as the US Dollar. However, things have changed. During this year, most of the analysts
have warned that China might be get involved in this war too due to the currencies of two of
Chinas major trading partners are Europe and Japan.
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The Yuan still in a moderate state and seems to be in a positive pace. China has begun to allow
the Yuan to weaken. Beijing is in a bind as it seeks to grow the economy. It needs to deflate the
wild lending boom of recent years, which rules out traditional monetary easing, and fiscal policy
runs up against a lack of suitable projects and ruinous local government finances. The China
Bank has allowed the Yuan to gradually weaken and to be in the modest state. It is still in
question whether China is going to be in the war or not.
MALAYSIA
For the past few months, Malaysian Ringgit has been in a weak state whereby the currency has
been hovering around and has been estimated to be falling even further. The reasons why the
currency falls down is due to the oil and gas industries as the sharp decline in global crude oil
prices that has been drop by more than 40% in less than six months, has cause a huge blow to
the economy. Supply has outstripped demand, which is bad news for any country whose major
export is oil. This is why the ringgit is taking a beating on the global stage.
Does Malaysia also get involved in this currency war? It is still a question as most of the
Asias countries are now experiencing devaluation of the currency impact from the BOJs
decision.
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CONCLUSION
The devaluation of the currencies can be seen in good or bad perspectives. From the good
perspective, it allows the investors as well as the exporters to gain more profits during these
current situations. It allows the countries to compete in terms of currency devaluations in order
to increase exports, this is actually been called as Currency Suicide. The government believes
that by weakening the currency, it will improve the domestically produced product
competitiveness in the world markets and lead to an export driven recovery.
When one country has devalued the currency, the others will follow in hope that this
will help to maintain or boost up their economy and protecting the trade dispute. However, this
also makes all of the countries to get involved in the currency war. According to J. Rickads, the
world is not always in the currency war, but when we are, they can last for five to ten, fifteen
and even twenty years. They can last for a long time. A weak currency might provide a shortterm boost to the countries engaging in currency devaluation, he said. Nevertheless, if
everyone is playing the same game, we will end up with more volatility of the currencies and
higher foreign exchange. This in turn will likely exact a toll on global trade and capital flows.
Thus, we need to be on the lookout for the changes of the currencies around the world in order
for us to become well aware with these situations and to come up with better plans for the
investment as well as the domestic production in the country.
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REFERENCES
1. Definition of Money. Retrieved from: http://www.cliffsnotes.com/moresubjects/economics/money-and-banking/definition-of-money
2. Definition of Currency. Retrieved from:
http://www.investorwords.com/1240/currency.html
3. Currency. Retrieved from: http://www.investinganswers.com/financialdictionary/economics/currency-120
4. Currency Devaluation and Revaluation. Retrieved from:
http://www.newyorkfed.org/aboutthefed/fedpoint/fed38.html
5. The Weakness of the Euro, Currency Wars and Migration. Retrieved from:
http://www.flassbeck-economics.de/the-weakness-of-the-euro-currency-wars-andmigration/
6. How The Unspoken Currency War Threatens To Be A Silent Killer In World Markets,
Retrieved from: http://business.financialpost.com/news/economy/how-the-worldsunspoken-currency-war-threatens-to-be-a-silent-killer-in-markets
7. Currency Wars Still Raging Retrieved from:
http://www.dailyreckoning.com.au/currency-wars-still-raging/2015/04/17/
8. Mapping The Next Nation To Join The Currency War, Retrieved from:
http://www.zerohedge.com/news/2015-02-09/mapping-next-nation-join-currency-war
9. The Dollar Joins the Currency Wars. Retrieved from: http://www.projectsyndicate.org/commentary/dollar-joins-currency-wars-by-nouriel-roubini-2015-05
10. China Calls The Shots In Asia's Currency War. Retrieved from:
http://www.cnbc.com/id/102436951
11. Currency War Means Currency Suicide. Retrieved from:
https://mises.org/library/currency-war-means-currency-suicide
12. Why You Should Worry about the Falling Ringgit. Retrieved from
https://www.drwealth.com/2014/12/17/worry-fallingringgit/?utm_medium=DISPLAY&utm_source=OUTBRAIN&utm_campaign=MY
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