Currency Manipulation: Currency is one of the important media of exchange when two countries trade or establish business relations with one another. The value of a country’s currency is thus an important factor that determines the amount of foreign trade. This provides an incentive for currency manipulations which can help improve the exports and thus the balance of trade. The aspect of currency manipulation is not legitimate but can be accomplished in some strategic ways which are within the legal norms.
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What is Currency Manipulation?
Currency manipulation is also known as currency interventions which are accomplished through a monetary or fiscal policy of a country. In such an intervention, the government sells or buys foreign currency in exchange for the currency of their own country. Such activity influences the exchange rate among the two currencies and leads to the desired situation.
Some of the experts indicate that currency manipulation is foreign exchange market intervention, which is important to boost the foreign operations of an economy while others think that such interventions disturb the normal trade operations. There are various economic units in a country that is interested in currency manipulations and wants to set a target that helps boost their business activities.
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Why is There a Need of Currency Manipulation?
The government and the policymakers in a country also have a set of objectives that are fulfilled through currency manipulations. Some of these objectives are as follows:
Regulating Inflations
One of the reasons why countries and the government resort to currency manipulations are to regulate the rate of inflation and price rise. The exchange rate of the home country about a foreign country leads to changes in the inflation rate for an open economy.
Improvement in the exports and foreign trade relations
Another reason for which the policymakers may choose to intervene or conduct currency manipulations is to improve the level of exports or foreign trade. Such interventions help to establish the rate in a manner that the home country products are cheaper in the foreign market. This helps to build demand in the foreign market and improve sales.
Economic growth
Another major reason for which the countries might intervene or conduct currency manipulations is for boosting the economic conditions of a country. When the rate of exchange is set at a rate that attracts foreign investments, it helps in the economic development of the country. Thus the developing and the under-developed countries might find it attractive to go for currency manipulations and improve the growth rate for a certain period.
Strategic development of important sectors of an economy
The government and the policymakers of a country may be interested in the currency manipulations, for improving the strategic sectors of an economy. There are various sectors that cannot be grown indigenously and are dependent on foreign trade. Through the estimated rate of foreign exchange, these sectors may get a direct boost.
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A Few More Objectives Served by Manipulation of Currency
Here are some of the most common and major objectives served by manipulation of currency:
Response to foreign depreciation
Sometimes, the government of a country may be interested in currency manipulation as a response to foreign currency depreciation or other changes in foreign currency. The central bank may find that the home currency has become out of sync with the economic growth rate of the country and maybe have adverse effects.
Improve trade deficit
Another reason why the countries use currency devaluation is to improve their positions of trade deficit. As a result of currency devaluation, the imports of a country decrease, and the exports increase. This brings changes in the balance of payments and also improves them. However, the continuous use of currency manipulation can lead to negative consequences for the country. The devaluation of the currency also leads to an increase in foreign-denominated loans which can create an adverse effect on the economy of the country. For example, most of the euro-denominated debts are increasing as these countries are resorting to currency devaluations.
Reduction in the sovereign debt burden
Another reason for which the countries may use currency manipulation is for reducing the sovereign debt burden. If a country has a large number of government issues debts, weakening the currency helps in making these debts less expensive. However, this should also be used with caution, as the global debt is more than the sovereign debts which can undermine the economic position of the country.
Sustaining economic policies
The aspect of currency manipulations is also used by the countries for sustaining various economic policies. Sometimes the government wants to give a boost to the indigenous industries of the country by increasing the value of the imports. Thus the developing countries may use such policies for the growth of the strategic industries of the economy. However such policies should be used with caution, as they lead to other challenges of devaluation.
Countries can utilize currency devaluations to achieve economic policy goals. A weaker currency in relation to the rest of the world can assist promote exports, reducing trade deficits, and lowering interest payments on the country’s outstanding government obligations. However, currency manipulation is a part of corporate finance, thus if you need some help with the subject, you can even take corporate finance homework help from us as well.
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Intervention Policies of Government
There are several policies and procedures through which currency manipulations are undertaken by the government of any country. The central bank of a country can increase the supply of money, one of the after-effects created is the increase in the rate of inflation. There are several challenges that are faced by the policymakers to determine the amount and the timing of interventions. Some of the important methods of intervention include the following:
Sterilized Interventions
Under such policy, the exchange rate of a country is influenced without any change in the monetary base of the economy. Thus, it is a process that is completed with the help of two major transactions. The central bank of the country purchases the bonds of the foreign currency with the help of the domestic currency that is issued. With the help of these two transactions, there is a swap of domestic bonds with foreign bonds. Thus there is no consequent change in the money supply of the economy. Therefore when any country aims to decrease the exchange rate, it purchases the bonds of foreign currency. At the same time, the central bank sells the bond of the domestic currency, which keeps the money supply the same.
Non-Sterilized Interventions
In such policy of interventions or currency manipulations, there is a change in the money supply in an economy. In this mechanism, the exchange rate is altered by purchasing the bonds of foreign currency through the currency of the domestic country. Therefore when any country aims to decrease the rate of exchange for the economy, it purchases the bonds of foreign currency. Thus there is a consequent extra supply of domestic currency. This change in the demand and supply factor reduces the rate of exchange.
Indirect Interventions
This mechanism of the intervention of currency manipulation brings changes in the exchange rate indirectly. Some of the common measures include exchange control or capital control. Such policies are often avoided by the countries as it leads to a reduction in the market confidence or development of inefficiencies in the operations of the economy. These are generally used as emergency control measures as they are damaging to the economy.
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Examples of Currency Manipulations
There have been several cases in the world economy which show the incidence of currency manipulations. One such was conducted by the Swiss National Bank, between the years 2011 to 2015. These central banks have set the minimum exchange rate for Euro and Swiss Franc. Thus, the currency of Switzerland could not strengthen beyond a certain limit. Such policy was continued for three and a half years after which the minimum exchange rate was released. There were some sectors of the economy which were benefitted while other sectors faced negative consequences.
Example 1 – China
China serves as another important example that resorted to currency manipulation for boosting the economy. The country has been known to intervene often and prevent the currency of the country to appreciate relative to other currencies. As a consequence of this act, the country has been able to experience a trade surplus for several years. Some of the experts and critiques even argue that the country has resorted to impermissible “currency manipulations” and therefore some strict actions should be taken by the international regulatory bodies. Some studies have concluded that China’s currency policies were similar to an export subsidy.
Example 2 – RBI played with Indian Rupee
Another case of currency manipulations can be seen by the Reserve Bank of San Francisco. As a response to China’s undervaluing of its currency, various countries of the world have resorted to currency manipulations or interventions. The exchange rate regime as followed by China has raised several controversies in the developed economies which also had to intervene in their exchange rate to deal with the situation. This undervaluation of the Chinese currency was detrimental for US workers and businesses. It started a phase where capital accumulation got diverted from the United States to China.
Example 3 – Japanese Yen
Another example of currency manipulation can be seen in the case of the Japanese Yen. There was a period from 1990 to 2000 when the country of Japan was experiencing a deflationary situation. Some of the economists indicate that it was a deflationary spiral that was difficult for the country to come out without any policy support. The rate of production in the country came to a stagnant situation, and the rate of unemployment continuously increased. The situation becomes so aggravated that some of the important banks of the country also failed. This was the time when the policymakers felt that it is important to intervene in the currency exchange rate. This estimated that it will stimulate the economy and bring the country out of deflation. Thus with the help of the ministry of finance, the central bank of the country conducted currency manipulations which helped the country come out of the deflationary situations.
Example 4 of Currency Manipulation – Russian Rubble
Another case of currency manipulation of currency interventions can be seen through the Russian ruble. The central bank of the country resorted to currency devaluation to improve its macroeconomic factors. These activities resulted in a surge in the economic growth of the country.
The aspect of currency manipulation has become a common trend among the countries boosting international trade. These are seen to be more common among the emerging economies of the world. This has become an important topic for discussion in international trade.
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Conclusion
Currency manipulation disproportionately affects the optional part of the economy, and American assembling segment lobbyists routinely allude to China as a currency controller. Carlos D. A 2013 examination by Ramirez found that “a one percent expansion in the portion of Congressional area work power in assembling is attached to the likelihood that locale officials will mark China a currency controller”.
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Frequently Asked Questions
| Q: What Happens When a Country Manipulates Its Currency? A: In a free market, American-made goods can compete anywhere in the globe. Markets are disrupted in three ways when countries manipulate currencies and unfairly lower the cost of their exports, harming the US economy and costing jobs. |
| Q: Which countries indulge in currency manipulation? A: Singapore, Switzerland, Taiwan, and Thailand have all been active manipulators in recent years. In 2020, Singapore and Switzerland were responsible for more than half of all currency manipulation. |