What exactly is a currency war and the implications?

[Coronita]

The news keeps talking about the potential of a currency war. What exactly is it? Do each country to to print more money and try to make their currency worth less to the other peers?…How does this work in the longer term?

[paramount]

In the case of China and the yuan I think China had no choice due to market forces.

Simply put: China reacted to market forces and had to devalue the yuan.

Not an exact answer, but something to consider.

China has a slowing economy, I guess they had to do something.

But as I understand China also agreed to allow market forces to play a larger role in setting the value of the yuan.

And yet somehow I doubt it’s all that simple.

[The-Shoveler]

It’s all about exports and Jobs.

China’s exports were down about 8% year over year, they are used to growing about 8% year over year.

They tried to get the internal consumption thing happening but there are more Chinese savers than spenders apparently and the Chinese stock market became the same casino it is here.

It will be interesting if this leads to a US stock market crash, the pension plans are already on the ropes as it is even near record highs.

[livinincali]

[quote=flu]The news keeps talking about the potential of a currency war. What exactly is it? Do each country to to print more money and try to make their currency worth less to the other peers?…How does this work in the longer term?[/quote]

Check out https://en.wikipedia.org/wiki/Currency_war

A couple of general things.
1) The world really hasn’t experienced a true currency war since the 1930’s during the great depression.
2) Everyone cannot devalue against everyone else. For every nation that gets more competitive with lower exchange rates another must get less competitive. Countries would likely use tariffs and other trade protection mechanisms to combat this.
3) In general to lower your exchange rate you are willing to sell your currency in exchange for foreign currency or assets. Now granted other countries central banks can attempt to do this as well so if you want to fix an exchange rate you’d have to be willing to effectively sell unlimited amounts of your currency. For example the Swiss central bank tried to do this last year and gave up after about 6 months.

All in all it’s bad for the economy because businesses no longer have confidence to order and produce goods because they might get hammered by a currency devaluation. If you are going to be invested in a company during a currency war you’d definitely want to be invested in something that’s entirely dependent on domestic goods and services. Multinationals will likely suffer.

[FlyerInHi]

The press is making a big deal out of nothing. China is just letting the yuan float a little more.

Remember that it costs foreign reserves to defend a currency peg.

A floating currency is another tool to letting to economy self adjust.

In the short term, there will be hot money going out is China, just like there was hot money pouring in, years ago, when appreciation was anticipated.

Maybe the Chinese will park some of that money in U.S. assets?

[livinincali]

[quote=FlyerInHi]Remember that it costs foreign reserves to defend a currency peg.
[/quote]

Only if you attempting to prop up the value of your currency. I.e. Russia with the Rubble was willing to sell foreign currency reserves to prop up the value of the Rubble. If you attempting to devalue you buy foreign currency reserves in exchange for your currency. To defend a peg it really matters whether the rest of the world thinks you currency is below market value of above market value. You buy foreign currency if they think your currency should be worth more (the case with china), you sell foreign currency if they think your currency should be worth less i.e. Venezuela, Russia, Ukraine.

[FlyerInHi]

Yes. the world now thinks the yuan should be worth less because their economy is slowing down.
The U.S. Dollar based trading band has caused the yuan to appreciate against the euro and other currencies of important China trading partners.

That’s why the hot money might want to pull money out before the yuan is worth even less.

[FlyerInHi]

This is a pretty good article about the current situation of currency valuations.

The strength of the US Dollar has proven Paul Krugman so right that he deserves another Nobel! No dollar debasement in sight.

The world has a bigger problem than China’s currency devaluation WONKBLOG | There are larger and much more important trends behind China’s recent actions http://wapo.st/1gGw2NM

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