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GRADUATE SCHOOL OF BUSINESS (GSB)

ZC 6333: INVESTMENT AND PORTFOLIO MANAGEMENT


PROJECT PAPER:

ARE THE CURRENCY WAR BACK ON IN 2015?


PREPARED BY:
NURUL ATHIRAH BINTI MD SAFFI [ZP 02096 ]
NASYWA BINTI SAHROZI [ZP 02095 ]

PREPARED FOR: PROF. DR LOW SOO WAH SUBMISSION


DATE: 30

TH

JUNE 2015
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CONTENTS
1

Introduction

What is Currency War?

Factors Contributing to Currency War

Currency War Today

Big Question:
ARE THE CURRENCY WARS BACK ON?

Response to the Issue:

11
12
14
15

United States of America


Europe
China
Malaysia

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

economists perspective, there are three


different types of money which are the fiat
money, commodity money and bank
money. Fiat money can be seen as good and which is less than the value that it represents as
money as for example, dollar bills as their value as slips of printed paper is fewer than their
value as money. In addition, commodity money is the good whereby the value serves as the
value of the money which we can take as example, gold coins. Other than that, bank money can
be look upon as the book credit whereby the banks will lengthen it to their depositors. The
transaction that has been made using checks drawn on the deposits held at the banks involve
with the use of bank money.
Most of the people would say that money is important for happiness, health and for the
family. However, how does the impact of money towards the economy? We can see the
impacts below:
Money promotes productivity and economic growth:
Before money was introduced, we lived in a world where barter system was a
top priority in obtaining the goods and services that we need. However, this
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system contained difficulties in terms of easy exchange between these two


matters and a hitch towards the division of the specialization and labor among
the individuals which eventually become the important factors in promoting
increase of economic growth and productivity. Due to this, when money was
introduced, it helps the process of the economic growth which then leads to the
development of production in terms of goods and services which then implies
the increase of the income for the people. The demand of money elevates in
order to finance the increased transaction brought by the expanded level of
economic activities. The supply of money is needed to be monitored in order to
meet the requirements of these increase activities.
Money promotes investment:
The important role of money lies within the magnitude of the independent of
the investment and the current of the level of savings whereby the greater the
current savings, the greater the investment. However, this is not applied to the
households and may be applied on the firms that invest the money in capital
goods. Investment is a monetary economy which can surpass the current level of
the savings. As the new money can be created by the government in terms of
currency or bank deposits, it is possible that the surplus of the investment over
savings can take place which is important towards the development of the
economy.
Money and Investment in Quick-Yielding projects:
Any increase in the supply of money in developing countries would lead to the
rise in prices or to the beginning of inflationary pressures. Still, this is not always
true. A reasonable amount of newly created money helps the development of
the economy by raising the level of investment. In the developing economies a
lot of natural and human resources lie un-utilized and underutilized which can be
employed for productive purposes.

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Monetization and Economic Growth:


Monetization is to monetize is to convert an asset into or establish something as
money or legal tender. It can refer to methods utilized to generate profit, while it
also can literally mean the conversion of an asset into money. We will look U.S.
Federal Reserve whereby they had monetize the nations debt which will directly
involve the process of purchasing debt which is also known as treasuries that in
turn will increase the supply of money. From this, we can see that monetization
will turn the debt into money.
We can see that money is very important towards the economic growth as well as the life to
begin with. Now, we will look upon currency and how it plays an important role in the economy
of the world.

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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WHAT IS CURRENCY WAR?


We often hear about the currency to be devalued,
revalue or overvalue due to the decisions that has
been made by the government in order to sustain
its fixed exchange rate. We tend to focus this
currency only in a country, but what about the
others? When a country devalues its currency, how
does this action impacts on the other countries all
over the world?
First of all, we need to define what a currency war is. Currency war can be define as
when an individual country lean heavily on pushing its currency down which then tend to shift
demand from one place to another rather than increasing the total. Currency wars can also be
seen as currency manipulation whereby the aim is to manipulate the currencies in order to
boost the exports in the country. Other than that, it is also known as competitive devaluation
whereby it is a condition in international affairs that the countries will compete against each
other in order to achieve a relatively low exchange rate of their own currency.
The term Currency War has been introduced by the Finance Minister of Brazil, Guido
Mantega which is to describe the competition between United States and China to have the
lowest value for their currencies in 2010. A lower value for the home currency will eventually
raise the price for the imports while making the exports cheaper. We can see that it is actually
good for the economy when the exports are cheaper and causes the investors and other
countries to buy more of their exports. However, it will significantly increases the risks for
cross=border trade and investment. This war focused on the emerging markets and it is
supposedly the right thing to happen whereby it is growing faster because their currencies to
be appreciate. This war is to be friendlier to the global economic growth.

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Factors Contributing to Currency War


There are three factors that we can see are heavily contributing towards these wars which are:

Quantitative Easing (QE)


This method seems to be reliable towards the country whereby the banks will create
new money in order to buy government bonds, securities from the banks with electronic
cash that did not exists before. By doing this, it will swells up the size of the bank
reserves in the economy with the quantity of the assets purchased.
The aim of QE is to stimulate the economy by encouraging the banks to make
more loans and for the banks to take the new money in order to buy assets as to replace
those that have been sold to the central bank. This action causes the increase of prices
of the stocks and the interest rates will become lower which contributes to the boost of
the investment. When this happens, it will give hope towards the encouragement of
greater spending by putting additional demand into the economy and pull it out of the
recession.
Nonetheless, due to this QE, the currency has become weaker and it is
continually doing so. The weakening of the currency by a certain country will affect the
others and might hurt the economy deeply as the others will need to follow the trend of
weakening the currency and pushing more debts in the countries. QE can be the
important factor that contributes to the spark of currency wars.

Trade dispute between countries


The disputes can be seen as the trade dumping which is known as flooding a domestic
market with goods or services to force the domestic produces out of the market and to
give the exporting country a monopoly. Nowadays, the numbers of trading disputes are
increasing as we speak due to the weakening of the currency and this has threatened
the global supply chains.

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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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CURRENCY WAR TODAY


Due to the weakening of the currency around the world and in Malaysia, many of the
economists has predicted that currency war is going to happen in the year of 2015 despite of
several events happened from October 2014 until now.

Big Question: ARE THE CURRENCY WARS BACK ON?


Japan has been known to face a massive financial problems from the year of 2010 until now
and some of the decisions that has been made by them cause a dramatically effect towards the
other countries. On 31st October 2014, Bank of Japan (BOJ) had announced an increase in its
annual target for expansion of the monetary base from 60-70 trillion to 80 trillion. Even at
110 to the dollar, there was still a chunky $700 billion a year increase (or about 2% of GDP).
The aim is to get inflation higher; if the recent sales tax increase is excluded, core inflation is
still running at 1%, too close to deflation for comfort. Due to this, the yen has dropped more
than 2% than dollar during that time that had created more spaces for the currency volatility.

Figure 1: Nikkei 225 October to November 2014


Source: http://money.cnn.com/data/world_markets/nikkei225/

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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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RESPONSE TO THE ISSUE


UNITED STATES OF AMERICA

Figure 3: US Dollar per 1 Japanese Yen

Figure 4: Japanese Yen per 1 US Dollar


Source: http://www.x-rates.com/graph/?from=JPY&to=USD&amount=1
From the figure above, we can spot that the currency exchange between Japan and U.S. has
decline dramatically. At the end of 2014, most of the economists believe that US is not going to
be affected by this weaken Yen as this helps the country to gain more investors as they have a

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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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Figure 5: Euro per 1 US Dollar

Figure 6: US Dollar per 1 Euro


Source: http://www.x-rates.com/graph/?from=EUR&to=USD&amount=1

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.

Figure 7: US Dollar per 1 Chinese Yuan

Figure 8: Chinese Yuan per 1 US Dollar


Source: http://www.x-rates.com/graph/?from=USD&to=CNY&amount=1

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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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