“International Currency War”
September 29, 2010    Disclosures    POSTED IN  EconomyInternational

Guido Mantega, Brazil’s finance minister this week declared that the world is “in the midst of an international currency war, a general weakening of the currency.” He was referring to the attempts by many nations such as Japan, Taiwan, Argentina, Russia, Australia, Switzerland, Columbia, Indonesia and Poland to name a few, to weaken their respective currencies. A country can try to weaken it’s national currency relative to another country’s currency by intervening in the currency market. For example Japan has been selling the Yen, its national currency,and purchasing other currencies such as the U.S. dollar. By selling the Yen, Japan has increased the supply of Yen and decreased the supply U.S. dollars in the world market. Given a constant level of demand for each currency along with stable inflation and interest rate expectations for each country this action would cause the Yen to depreciate relative to the U.S. dollar.

Since March 2009 the currencies of many countries around the world have appreciated versus the U.S. dollar. The impact of the appreciation of a country’s currency in a nation like Japan, a major exporter, has been a decrease in global competiveness. A strong Yen versus the U.S. dollar makes a Japanese product more expensive to sell to a United States consumer who buys the product with a weak dollar. Since June 2007 the Japanese Yen has risen nearly 50% against the U.S. dollar. In June of 2007 it took $8.10 to buy 1,000 Yen. At one point during September 2010 it took $12 to purchase 1,000 Yen. A continued rise in the Yen compared to the U.S. dollar makes Japanese exports less attractive to the U.S. consumer as the cost in dollar terms increases.

 Currency Appreciation Versus the U.S. Dollar

 March 2009 to September 2010 

USD=U.S. Dollar JPY=Japanese Yen EUR=Euro GBP=Great British Pound BRL=Brazilian Real RUB=Russian Rubble CNY=Chinese Yuan

For countries that rely on exports as a major source of growth for their economy a rapidly appreciating currency can stunt economic growth. If a country does not have a strong level of domestic demand for the goods it produces and services it provides then firms will find it harder to sell their goods and services. Net exporting nations, all else equal, benefit from a weaker domestic currency compared to the foreign nation they are trading with.A weak currency can, however make it harder for a country to issue government debt.A government bond denominated in a currency that is depreciating is not attractive to a foreigner. In addition, the citizens who live in a country with a weak domestic currency will find it more expensive to buy foreign goods.
According to 2007 World Bank statistics the countries that rely heavily on exports net of imports are both geographically and economically diverse.
2007 Net Exports as a Percentage of GDP

Click for larger image

Source: World Bank
  Legal, Privacy and Compliance Documents