Intellectual Thoughts by Sanjay Panda !!!!!: Currency war

Sunday, February 15, 2015

Currency war

There is a growing consensus  that an unspoken currency war has broken out. Countries from Australia,  Japan, China, South Korea, Singapore, Thailand, New Zealand, Israel,  Sweden, Switzerland, Denmark, Norway &  to those that are part of the European Union are now  trying to  stabilize prices or gain competitiveness, simply by  easing the monetary policies  to weaken their currencies.

Many countries, earlier  used tools like  rate cuts,  quantitative easing ( QE)  or direct interventions on the  currency markets  to export deflationary problems to others and gain growth . With out much of success,   now they seems to  apply the other  mechanism available to generate demand  is  the  monetary policy.

But this is ultimately   a zero-sum game,  as someone gains only because someone else will lose.  A weak currency might provide a short-term boost to the countries engaging in currency devaluation. However, if everyone is playing the same game,  we will end up with  more and higher FX volatility. This in turn likely exact a toll on global trade and capital flows.