Currency war

Currency war, also known as competitive devaluations, is a condition in international affairs where countries seek to gain a trade advantage over other countries by causing the exchange rate of their currency to fall in relation to other currencies. As the exchange rate of a country's currency falls, exports become more competitive in other countries, and imports into the country become more and more expensive. Both effects benefit the domestic industry, and thus employment, which receives a boost in demand from both domestic and foreign markets. However, the price increases for import goods (as well as in the cost of foreign travel) are unpopular as they harm citizens' purchasing power; and when all countries adopt a similar strategy, it can lead to a general decline in international trade, harming all countries. Historically, competitive devaluations have been rare as countries have generally preferred to maintain a high value for their currency. Countries have generally allowed market forces to work, or have participated in systems of managed exchanges rates. An exception occurred when a currency war broke out in the 1930s when countries abandoned the gold standard during the Great Depression and used currency devaluations in an attempt to stimulate their economies. Since this effectively pushes unemployment overseas, trading partners quickly retaliated with their own devaluations. The period is considered to have been an adverse situation for all concerned, as unpredictable changes in exchange rates reduced overall international trade. According to Guido Mantega, former Brazilian Minister for Finance, a global currency war broke out in 2010. This view was echoed by numerous other government officials and financial journalists from around the world. Other senior policy makers and journalists suggested the phrase "currency war" overstated the extent of hostility. With a few exceptions, such as Mantega, even commentators who agreed there had been a currency war in 2010 generally concluded that it had fizzled out by mid-2011.