Currency Wars, Battles, And Hostile Actions :: The Market Oracle :: Financial Markets Analysis & Forecasting Free Website

Currency Wars, Battles, And Hostile Actions :: The Market Oracle :: Financial Markets Analysis & Forecasting Free Website



With its recent miniscule 2% devaluation of the Yuan, media pundits noted that China had now also entered into the global currency war.  What this comment implies is that other countries with the ability to issue or print their own currency, including the U.S., have been participating in a currency war by devaluing their own currency as a hoped for means to increase their country exports and thereby stimulate their economies.  As China’s currency has been pegged to the USD, it had recently grown stronger as a byproduct of dollar’s recent dramatic strength.  Accordingly, the peg that China used to tie-in to the dollar’s value had increased the Chinese yuan to a level that was hurting their exports.  The resulting devaluation was China’s attempt to correct partially this unwelcome currency appreciation.





With FED’s past QE series of money printing, we have been at the forefront attempting to devalue our own currency as a means to improve our exports, reach the FED’s stated goal of increasing inflation which would produce higher GDP figures, allowing government officials to claim that economic growth or recovery is resuming.  Not to be outdone, the European Central Bank has been purchasing weak credits from their banks, in order to make member bank financial solidity ratios appear stronger – which also requires substantially increasing its money supply.  The largest and most outrageous example of intentional destruction in the value of its currency is Japan, which for nearly two decades has been on a mission to devalue its currency in order to stimulate inflation.



Currency expansion may seem like an ideal, benign solution to a country trying to stimulate its exports, but it does create a financial assault or loss to their trading partners.  For example, China’s recent holding in excess of $1.3 trillion assets (until some recent sales of under $200 billion) from accumulated annual trade surpluses, would lose great value in its assets by the amount of such U.S. devaluation.  If the U.S. were to expand its currency by 10%, China’s Treasury holdings could be reduced by $100 billion – not an insignificant amount.  That is of course why the well known phrase “race to the bottom” stipulates that once one country starts to print currency, other countries, in order to protect themselves against the action of the initiator, have to follow and also devalue their own currency.  We are currently witnesses to a race to the bottom in a continuing global currency war.



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