TON DUC THANG UNIVERSITY

FACULTY OF BUSINESS ADMINISTRATION

----------------------

REPORT
SUBJECT: MACROECONOMICS
TOPIC: CURRENCY WAR

Group : 4
Lecturer: Phạm Văn Quỳnh

STUDENT’S NAME AND ID:

- Đinh Quang Hiệp – 720K0857
- Nguyễn Trần Đông Quân – 720K0982
- Trần Thị Ngọc Trâm – 720K0904
- Nguyễn Ngọc Thảo Uyên – 720K0912

HCMC, December 21st ,2021

 STUDENT’S NAME STUDENT’S ID LEVEL OF COMPLETION

Đinh Quang Hiệp 720K0857 100%

Nguyễn Trần Đông Quân 720K0982 100%

Trần Thị Ngọc Trâm 720K0904 100%

Nguyễn Ngọc Thảo Uyên 720K0912 100%

SELF-ASSESSMENT
 INTRODUCTION

Modern economy has become a space for free competition thanks to

globalization, liberalization of capital flow. Therefore, economies of

countries are closely and globally connected.  

 Currency wars which had taken place in the past and are happening

now have produced major challenges, affecting many countries in

many aspects. 

Our essay’s objectives were to identify factors that influence the

direction exchange rates, to determine whether activities of countries

can be described by the term “Currency war” and consequences of

this phenomenon for developing countries, developed countries as

well as the global economy. 

The main method used in this essay to assess the situation was to

review theoretical points to analyze the case of the Currency War

between China and the US and suggest feasible solutions to

overcome these issues. 

 ACKNOWLEDGEMENT
 Our essay could not be completed without the deliberate
instructions of the lecturers. Therefore, we would like to
gratefully give acknowledgment to the support and motivation
of our lecturers during the time of doing this research. 

 Firstly, we would like to express our warmest thanks and

gratefulness to our supervisor Mr. Pham Van Quynh. Even
though we have difficulties in the learning process due to the
emergence of the Covid-19 pandemic, our lecturer still kindly
supported during online classes and provided us with profound
insights into Macroeconomics and related issues, facilitating
us through the process of researching and completing our
thesis. Without his dedicated instructions, our essay would
have been impossible to be done effectively. 

 Secondly, I would like to state our thanks to Ton Duc Thang

University and lecturers in Business Administration
Department for available materials to finish this essay as well
as our degree in the future.
 CONTENT
CHAPTER 1: THEORIES..............................................................1
1.1 Money....................................................................................... 1
1.1.1 Definition:...........................................................................1
1.2 Currency war............................................................................2
1.2.1 Definition:........................................................................... 2
1.2.2 The way wealth effect works:.............................................2
1.3 Open-market operation:............................................................3
1.3.1 Definition:...........................................................................3
1.3.2 Effect on money supply:.....................................................4
1.3.3 Types of OMOS:.................................................................5
1.4 Central bank.............................................................................. 6
1.4.1 Definition:...........................................................................6
1.5 Currency intervention...............................................................7
CHAPTER 2: A DETAILED ANALYSIS.....................................9
2.1 HISTORY OF THE CURRENCY WAR.................................9
2.1.1 Currency War I (1921 – 1936):...........................................9
 2.1.2 Currency War II (1967 – 1987):........................................10
2.1.3 Currency War III (2010):..................................................11
2.2 WHY DO COUNTRIES WANT TO DEVALUE THEIR
CURRENCIES?...........................................................................12
2.3 HOW ARE CURRENCY WARS RAGED?..........................13
2.4 WHAT ARE THE POSITIVE AND NEGATIVE IMPACTS
OF CURRENCY WARS? ;.........................................................17
2.4.1 POSITIVE IMPACTS:.....................................................17
2.4.2 NEGATIVE IMPACTS...................................................19
2.5 EXAMPLE: CURRENCY WAR BETWEEN THE US AND
CHINA......................................................................................... 22
2.6. HOW TO STOP CURRENCY WARS?................................25
2.6.1 WHY DO WE NEED TO AVOID CURRENCY WARS?
................................................................................................... 25
2.6.2 SOLUTION TO CURRENCY WARS.............................25
2.7 CONCLUSION......................................................................27
BIBLIOGRAPHY:........................................................................29
 CHAPTER 1: THEORIES
1.1 Money
1.1.1 Definition:
- Money is an economic unit that operates as a universally
recognized medium of exchange for transaction purposes in an
economy. Money serves the function of minimizing transaction
cost, namely the twofold coincidence of desires. Money begins in
the form of a commodity, having a physical quality to be accepted
by market players as a means of trade. Money may be: market-
determined, legally issued legal tender or fiat moneys, money
substitutes and fiduciary media, and electronic cryptocurrencies.

- Money is a liquid asset used in the payment of transactions. It

works based on the universal acceptance of its worth inside a
governmental economy and globally via foreign currency. The
present worth of monetary money is not always determined from the
materials used to make the note or coin. Instead, value is generated
from the willingness to agree to a shown value and depend on it for
usage in future transactions. This is money's principal function: a
commonly recognized means of exchange that individuals and
global economies desire to possess and are ready to accept as
payment for present or future transactions.

+ Money is usually referred to as currency. Economically, each

government has its own money system. Cryptocurrencies are also
being created for funding and international trade around the globe.

1
+ Money is frequently referred to as currency. Economically, each
government has its own money system. Cryptocurrencies are also
being established for finance and international commerce
throughout the world.

1.2 Currency war

1.2.1 Definition:
- Currency war, also known as competitive devaluations, is an
escalation of purposeful currency devaluation policies among two or
more governments, each of which is aiming to boost its own
economy. Currency values vary regularly in the foreign exchange
market. However, a currency war is distinguished by a number of
countries concurrently engaging in policy actions targeted at
depreciating their currencies.

+ In a currency war, commonly referred to as competitive

devaluation, governments depreciate their currencies in order to
make their own exports more appealing in markets outside. By
successfully cutting the cost of its exports, the country's goods
become more desirable to outside purchasers. And, by making its
imports more costly, currency depreciation may favorably impact a
nation’s trade imbalance.

+ Currency depreciation also drives domestic customers to hunt for

local alternatives to imported items. This in turn offers a boost to
local industry. This combination of export-led development and
greater domestic demand typically results to more employment and
faster economic growth.

2
- The wealth effect is a behavioral economic theory stating
that people spend more as the value of their assets rise. The premise
is that people feel more financially secure and confident about their
wealth when their homes or investment portfolios increase in value.
They are made to feel wealthy, even though their income and fixed
costs remain the same as before.

1.2.2 The way wealth effect works:

- The wealth effect illustrates the psychological influence that
growing asset prices, such as those that occur during a bull market,
have on consumer spending behavior. The notion hones focus on
how the sentiments of security, referred to as consumer confidence,
are increased by substantial rises in the value of investment
portfolios. Extra confidence relates to greater levels of spending and
lower levels of saving.

- This notion may also be applied to enterprises. Companies tend to

raise their employment levels and capital expenditures (CapEx) in
reaction to growing asset prices, in a similar pattern to that
witnessed on the consumer side.

1.3 Open-market operation:

1.3.1 Definition:
- Open market operations (OMO) refers to the Federal Deposit (the
Fed) practice of purchasing and selling U.S. Treasury securities,
along with other assets, on the open market in order to manage the
quantity of money that is on reserve in U.S. banks. This supply is

3
what's available to loan out to companies and consumers. The Fed
acquires Treasury securities to raise the supply of money and sells
them to lower the quantity of money.

+ Open-market operations may also be employed to stabilize the

prices of government assets, a purpose that contrasts at times with
the credit policies of the central bank. When the central bank
purchases securities on the open market, the effects will be to
increase the reserves of commercial banks, a basis on which they can
expand their loans and investments; to increase the price of
government securities, equivalent to reducing their interest rates; and
to decrease interest rates generally, thus encouraging business
investment. If the central bank to sell securities, the effects would be
reversed.

+ Open-market operations are generally conducted out with short-

term government securities (in the United States, often Treasury
bills) (in the United States, frequently Treasury bills). Observers
dispute on the advisability of such a policy. Supporters think that
trading in both short-term and long-term securities would disrupt the
interest-rate structure and hence the distribution of credit. Opponents
think that this would be totally acceptable since the interest rates on
long-term assets have more direct impact on long-run investment
activity, which is responsible for swings in employment and income.

1.3.2 Effect on money supply:

- The open market operations conducted by the Federal
Reserve affect the money supply of an economy via the purchasing
and selling of government assets.

4
- When the Federal Reserve purchases government securities on the
open market, it increases the reserves of commercial banks and
allows them to increase their loans and investments; increases the
price of government securities and effectively reduces their interest
rates; and decreases overall interest rates, promoting business
investments.

1.3.3 Types of OMOS:

-Permanent Open Market Operations: This is engaged in outright

buying and selling of government securities. Such an operation is
regarded to have long-term benefits like inflation, unemployment,
adapting the trend of money in circulation.

- Temporary Open Market Operations: This is frequently done

for the reserve requirements that are transitory in nature or to supply
money for the short term. Such an action is done using either repo
or reverses repos. A repo is an arrangement under which a trading
desk buys a security from the central bank with a pledge to sell it at a
later date. It may alternatively be seen as a short-term collateralized
loan by the central bank with the difference between the purchase
price and the selling price as the interest rate on the security. Under a
reverse repo, the trading desk sells the security to the central bank
with an agreement to acquire at a future date. Overnight Repos and
reverse repos are utilized for such brief open market activities.

Examples:

5
- The Federal Reserve Bank (Central Bank of United States)
purchased $175 million MBS from banks that had been originated
by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.
Between January 2009-August 2010, it also bought $1.25 trillion in
MBS that had been guaranteed by Fannie, Freddie, and Ginnie Mae.
Between March 2009-October 2009, it purchased $300 billion of
longer-term Treasuries from member banks.

- As the Fed’s short-term Treasury bills aged, it used the proceeds to

acquire long-term Treasury notes to keep interest rates low. It
continues to acquire MBS using the revenues of MBS that matured.

1.4 Central bank

1.4.1 Definition:
- A central bank is a financial organization with privileged authority
over the generation and distribution of money and credit for a
country or a group of states. In contemporary economies, the central
bank is typically responsible for the development of monetary
policy and the regulation of member banks.

- Central banks are essentially non-market-based or even anti-

competitive organizations. Although some are nationalized, many
central banks are not government organizations, and hence are
typically promoted as being politically autonomous. However, even
if a central bank is not legally owned by the government, its rights
are created and guaranteed by legislation.

Example:

6
Along with the steps described above, central banks have further
options at their disposal. In the U.S., for example, the central bank
is the Federal Reserve System, dubbed "the Fed". The Federal
Reserve Board (FRB), the governing body of the Fed, may alter the
national money supply by modifying reserve requirements. When
the required minimums fall, banks may lend more money, and the
economy’s money supply grows. In contrast, rising reserve
requirements diminishes the money supply. The Federal Reserve
was founded with the 1913 Federal Reserve Act.

When the Fed reduces the discount rate that banks pay on short-term

loans, it also increases liquidity. Lower rates improve the money
supply, which in turn stimulates economic activity. But reducing
interest rates may fuel inflation, therefore the Fed must be wary.

And the Fed may undertake open market operations to adjust

the federal funds rate. The Fed buys government assets from
securities dealers, giving them with cash, therefore boosting the
money supply. The Fed sells securities to get the cash into its
pockets and out of the system.

1.5 Currency intervention

- A currency intervention is a monetary policy tool that entails a
central bank taking an active, participation role in influencing the
monetary funds transfer rate of the national currency, generally
using its own reserves or its own power to produce the currency.
Central banks, particularly those in developing nations, operate in
the foreign currency market in order to create reserves for

7
themselves or give them to the country's banks. Their purpose is
frequently to stabilize the exchange rate.

+ When a central bank increases the money supply via its different

techniques of doing so, it must be cautious to limit unforeseen
outcomes such as rapid inflation. The effectiveness of foreign
currency intervention relies on how the central bank sterilizes the
effects of its operations, as well as overall macroeconomic policies
imposed by the government.

+ Two issues that central banks have are selecting the time and
quantity of involvement, since this is typically a judgment call
rather than a cold, hard fact. The number of reserves, the sort of
economic problems confronting the nation, and the ever-changing
market circumstances necessitate that a good lot of study and
information be in place before choosing how to adopt a profitable
course of action. In certain circumstances, a remedial intervention
may have to be made immediately after the initial attempt.

Example:

8
 CHAPTER 2: A DETAILED ANALYSIS
2.1 HISTORY OF THE CURRENCY WAR
2.1.1 Currency War I (1921 – 1936):
- There have been three Currency wars in the past one hundred
years. Currency War I occurred from 1921 to 1936. It truly began
with the Weimar excessive inflation. There was a time when
currency devaluation took place continuously.

- In 1926, Germany destroyed its own currency with a hyperinflation

planned at first to further improvement of competitiveness then
taken to ludicrous lengths to annihilate an economy weighed down
due to the burden of war reparations.

- Next country that had an out-of-control inflation is France, in 1925,

they devalued the franc currency in order to get back to the gold
standard, hence acquiring a export edge like the United States and
England who might get back to gold at prewar rate.

- In 1931, Germany was being supported by President Herbert

Hoover when he placed a moratorium on war reparations payment.

9
Britain broke with gold in 1931, recapturing the land lost to France
in 1925. The moratorium became extremely durable because of the
1932 Lausanne Conference. Later 1933, with the ascent of Hitler,
Germany progressively headed out in a different direction and pulled
out from world exchange, turning into a more autarkic economy, yet
with connections to Austria and Eastern Europe. The United States
moved in 1933, likewise devaluing against gold and recovering a
few of the strategic advantage in export pricing lost to England in
1931. At last, it was the turn of France and England to devalue once
again. In 1936, France broke with gold and turned into the last
significant nation to emerge from the worst impacts of the Great
Depression while England devalued again to recapture some of the
benefit it had lost against the dollar later Franklin Delano
Roosevelt’s devaluations in 1933.

- Current War I was not settled until World War II and afterward,
until the Bretton Woods gathering.

2.1.2 Currency War II (1967 – 1987):

- This is the point at which the world was put on another monetary
standard. Current War II seethed from 1967 to 1987. The
fundamental occasion in this conflict was Nixon’s taking the U.S.
and eventually the world, off the gold standard on August 15, 1971.

- The Bretton Woods era, 1944 to 1973, while interspersed by a few

downturns, was a whole period of currency stability, low inflation,
low unemployment, high development and rising genuine salaries.
This period was, in almost every respect, is an era contrary to the
Currency War I. Under Bretton Woods, the global monetary system

10
was moored to gold through a U.S. dollar freely convertible into
gold by exchanging accomplices at $35 per ounce. Short-term
lending to specific nations in case of import or export imbalances
would be given by the International Monetary Fund. Regardless of
the persistence of Bretton Woods into the 1970s, the seeds of
Currency War II were planted in the mid-to late 1960s. One can date
the start of Currency War II from 1967, while its predecessors lie in
the 1964 avalanche appointment of Lyndon B. Johnson and his
“guns and butter” platform. The guns alluded to the conflict in
Vietnam and the butter alluded to the Great Society social programs,
including the war on poverty.

2.1.3 Currency War III (2010):

- Three super currencies – the dollar, the euro and the yuan – given
by the three biggest economies in the world – the U.S., the European
and the People’s Republic of China – are the superpowers in the
Currency War III, which started in 2010 as a result of the 2007
depression.

- Nowadays, investment in Currency Wat is not generally restricted

to the national issuers and their national banks. Association stretches
out to multilateral and worldwide organizations like the International
Monetary Fund, World Bank, Bank for International Settlements and
United Nations, as well as private elements, for example,
multifaceted investments, global businesses and private family
offices of the super-rich. Regardless of whether as speculators.
Hedgers or manipulators, these private foundations have as much
impact over the destiny of currencies as the nations issue them. To

11
see that the battle lines are global, not neatly restricted to nation
states, one need just consider the frequently recounted story by
George Soros that “Broke the Bank of England '' in 1992 on a
gigantic bet. Until now, there are a lot more multifaceted
investments with a bigger number of trillions of dollars in influence
than Soros would have envisioned twenty years prior.

- Battle in the Pacific, Atlantic and Eurasian theaters of Currency

War III have started with significant sideshows that took place in
Brazil, Russia, the Middle East and throughout Asia. Current War III
will not be battled about the destiny of the genuine or the ruble,
nonetheless; it will be battled about the general qualities of the
dollar, the euro and the yuan, and this will influence the future of the
nations that issue them as well as their exchanging accomplices.

2.2 WHY DO COUNTRIES WANT TO DEVALUE THEIR

CURRENCIES?
- Devaluation can be seriously considered as a solution to alleviate
unemployment issues. It is true that there are several different
approaches to this problem, a good example is increased public
spending, which is ruled out due to the high risk that a country could
face high public debt.

- When a country has a balance of payments imbalance which a

devaluation would help correct

- Emerging economies are most likely to opt for currency

devaluation because they are becoming developed countries due to

12
its expansion of trade and investment. Therefore, maintaining a
relatively low exchange rate helps them attract other foreign
countries.

- The devaluation of Brazil’s currency could be a good example for

this. By the end of January 1999, Brazil officially devalued its
currency (Brazilian real), which depreciated 66% against the U.S.
dollar. This is because this country faced serious problems in the
1990s, one of which is the rise in unemployment. Therefore,
depreciating currency would make exports go up and imports should
go down, leading to aggregate demand increasing in order to expand
the economy and open up more job opportunities for the citizens.
After devaluation, it can be clearly seen that the unemployment rate

dropped significantly by 2%.

2.3 HOW ARE CURRENCY WARS RAGED?

- It is worth noting that exchange rates indicate the value of the
currency of one nation against that of another. Therefore, to
initiate currency wars, countries would strive to decrease their
exchange rate.

13
- There are many ways to do it but the firm foundation of
exchange rate decline is to increase the supply of their
domestic currency. This is because when the supply of
currency is greater than demand, in other words, the currency
becomes abundant, the value of the currency will drop

- Central banks across the world have several tools to increase

the money supply by expanding credit:

14
- Firstly, to increase the money supply, the central banks could
decrease interest rates.

Source: How to reduce value of a currency - Economics Help

- For example, if the central bank of the UK decreases the

interest rate from 1.3 to 1.1 to attract a higher amount of
reserves banks borrow. The more banks borrow, the more
reserves the Fed has for new loans fundings, hence increasing
the money supply.
- Furthermore, declining interest rates would make UK banks
less attractive for investors to save money in. Therefore, they
might shift their savings to other banks, for instance, US
banks. This trend would require the selling of pounds and
buying of dollars to be able to save money in US banks, which

15
 will eventually result in currency depreciation or a drop in the
value of the Pound.

- Secondly, central banks can also use the technique which is

known as open market operations

Source: Open market operation - Wikipedia

 The central bank can either buy or sell government bonds from
a bank or other financial assets in the open market to increase
or decrease the money supply. The central bank will pay by
depositing reserves in that bank. With more reserves, as the
same method, the bank could make more loans, hence
increasing the money supply

16
- Thirdly, the government could initiate what is called Currency
Intervention to keep the value of a domestic currency lower
relative to foreign currencies or vice versa.

- For example, If the U.S. wants to decrease the value of the

dollar, for instance, the Fed will sell U.S. dollars to make the
currency lose its value. Additionally, the Fed can increase the
money supply to buy more foreign currency, which also drives
down the value of the domestic currency.

17
2.4 WHAT ARE THE POSITIVE AND NEGATIVE IMPACTS
OF CURRENCY WARS? ;
2.4.1 POSITIVE IMPACTS:
- Currencies are kept weak in order to make exports competitive
on the global stage:

+ Exchange rates are what determine the value of a currency when

the goods are exchanged between countries. The weaker currency is
equivalent to lower exchange rates, hence leading to the lower price
of exports. It will be an encouragement for other countries to import
goods from this country. That’s why even though not every country
can simultaneously increase its net exports, they can all increase
their exports.

- Currency wars can shrink trade deficits:

+ Since export is becoming cheaper and import is becoming

more expensive, the balance of trade will be improved,
shrinking trade deficits in countries. Consistent deficits
will make countries lose their manufacturing industries and
related jobs. - Consistent deficits are unsustainable in the
long run and can lead to dangerous levels of debt which can
cripple an economy.

- Currency wars can increase economic growth.

Currency war can boost economic growth because of many reasons:

18
 ● Because the export demand is higher, the businesses would be
able to employ more workers, which reduces the
unemployment rate.

● The citizens would make more purchases which will increase

the overall output of the country.
- Currency wars can reduce the national debt of countries who
devalue their currency:

+ Currency devaluation could determine how a country

pays its debt. To be more specific, only when the national
debt is denominated in the devalued currency, then the debt
will be easier to pay off, as the country will have to spend
less money paying back foreign investors.

+ For instance, if the US government has to pay $4 million

in interest payments each month on its outstanding debts
and the US has just experienced currency devaluation. This
means that the same $4 million of notional payments
becomes less valuable, it will facilitate the US to cover that
interest. Let us say that if the domestic currency is devalued
to 95% of its initial value, the $4 million debt payment will
only be worth $3.8 million now.

2.4.2 NEGATIVE IMPACTS

- The currency wars result in an increase in the inflation rate

- Increasing the money supply, which is central to wage

currency wars, is the main contributor to the increase in the
inflation rate.

19
- In the long term, high inflation which is attributable to
confusion and uncertainty can ripple into the economy as a
whole. Instability grows and companies are unwilling to risk
investments. As a result, long-term economic development and
investment are discouraged.
- The 3 most common problems that disincentivize economic
development and investment are:

● Business uncertainty: high and volatile inflation reduces the

confidence of the businesses because they cannot be sure of
what their costs and prices are likely to be. This uncertainty
might lead to a lower level of capital investment spending.

● Reducing real incomes: As inflation rates keep surging, the

real incomes of the labor force keep declining, which is
associated with weaker purchasing power.

- Currency wars detrimentally impact the exporting and

emerging market countries.

- These wars increased the currency values of Brazil and other

emerging market countries. As a result, world commodity
prices rose. Oil, copper, and iron are the primary exports of
some of these countries—when prices rise for these
commodities, demand begins to fall, causing economic
slowdowns for the exporting countries.
- Let us take the situation of the increasing price in oil slowing
down the economy of Brazil as an example to explain this
statement:

20
- From 2008 to 2009, the price of oil surged to 140 USD/ barrel.
Remarkably, high oil prices can reduce demand for other
goods using petroleum and services such as transportation,
heating, etc. because they reduce wealth, as well as induce
uncertainty about the future. Meanwhile, Brazil places a heavy
dependence on oil as its exported goods, hence the exports of
Brazil became less competitive and slow down its economic
growth.

● The burden put on emerging market countries to follow those

countries engaging in currency wars to reduce the strength of
21
 their currencies may lead to longer-term risks of bubbles
becoming inflated due to the excessive stimulus from domestic
actions together with inflows from foreigners.

● A fresh outbreak of ‘currency wars’ (the manipulation of

currencies to boost exports) will significantly increase risks for
cross-border trade and investment

2.5 EXAMPLE: CURRENCY WAR BETWEEN THE US AND

CHINA
● In 2019, President Donald Trump officially announced that the
United States will impose 10 percent tariffs on $300 billion of
Chinese imports starting from September 1, 2019. China
retaliated by letting the yuan drop to its lowest value since
2008 by artificial means. The currency is trading at just over 6
yuan to the dollar now, in the last month of 2021.

22
Yuan/ Dollar Exchange rate from 2005 to 2019

Source: Does China Devalue Its Currency? - UFM Market Trends

Yuan/ Dollar Exchange rate in 2021

Source: • Monthly exchange rate Chinese yuan to U.S. dollar 2021 |

Statista

- The US, in response, declared China a currency manipulator,

using the yuan to gain an “unfair advantage” in trade. And this
policy of China put the United States in a situation to retaliate
by lowering its currency as well, which eventually caused a
currency war.
- Responding to the moves of China and the accusation of the
USA- the two strongest economies in the world, other

23
 countries are left with no choice but to weaken their currency
as well to defense themselves

New Zealand’s central bank cut its rate by half a percentage

point

- The Reserve Bank of India cut its benchmark rate by 0.35

percentage points.
- The Bank of Thailand also reduced interest rates to 1.50%
from 1.75% as a defensive action
- The far-flung devaluation of currencies has a destabilizing
effect on markets, especially stock markets and the growth of
countries. Unstable exchange rates discourage foreign
investments and slow down the pace of global economic
recovery. The effects on the stock market could be seen from a
similar event in 2015 when China also devalued its currency in
August. Investors considered the yuan devaluation as a sign
that China’s economy was deteriorating. As a result, risky
assets, especially equities, were rapidly sold off. The S&P 500
SPX, -0.75% fell more than 12% from peak to trough in the
span of a week, which was the first correction of this size in
four years.

24
Source: The events that rocked financial markets in 2015 -
MarketWatch

2.6. HOW TO STOP CURRENCY WARS?

2.6.1 WHY DO WE NEED TO AVOID CURRENCY WARS?
- Considering the currency wars fought in the past, they always
ended badly, leading to a high inflation rate, recession retaliation,
and so forth. The risks nowadays are even much greater due to
globalization, which makes the financial connections between
countries all over the world more and more complex. If the global
economic leaders such as the US and China fail to learn from the
past, dire consequences will be inevitable.

2.6.2 SOLUTION TO CURRENCY WARS.

 Global rebalancing is the key to ending currency wars.

 The positive impacts that currency wars bring about are

temporary. Therefore, countries should aim for other ways
with a view to obtaining a sustainable growth

25
  On the one hand, the current account surplus economies
should focus on expanding their domestic sectors and thereby
establish a virtuous circle between output, employment, and
income. It is clearly seen that current account surplus
economies are not always beneficial because It could be the
situation that a current account surplus is the result of a

recession and low consumer spending, in other words, low

aggregate demand is causing a current account surplus. During
the crisis, “external uncertainties” could make this economic
ramification severe. In this case, actively expanding domestic
demand and relying more on the domestic market to achieve
their economic goals would be a superior choice. And the
opposite is true for the current account deficit economies.

Source: How to Avoid a Currency War - Carnegie Endowment for

International Peace

- For example, according to the chart, the United States saw a

negative change in domestic demand from -0.8%. Therefore, if
the US strives to stimulate domestic demand, it would make a
great contribution to its economic growth.

26
  The IMF (International Monetary Fund) plays a central role in
this journey.

- IMF is a global organization with the aim of stabilizing

exchange rates and helping deal with economic crises by
providing international coordination – loans, plus advice.
 The IMF can perform as an economic supervisor to suggest
possible dangers to work on crisis prevention by highlighting
areas of economic imbalance. However, it cannot compel a
country to change its exchange rate. It can only offer economic
advice and discuss how changes in countries’ exchange rates
might be in their own interest. It can also provide a forum,
such as its new multilateral consultation mechanism or
discussion on the IMF executive board, where other countries
can urge a country to change its exchange rate procedures. In
the end, the decision still lies with the country alone.

2.7 CONCLUSION
 Currency effects become a currency war when one country’s
depreciation leads to retaliation as the example of the currency
war between the US and China.
 The currency wars have no winner

 As we thoroughly illustrated in chapter 2, currency wars

undoubtedly exert some short-term positive impacts, but these
would not be likely to prolong. In the end, every country
involved in the war is subject to extreme consequences.

 The currency wars have more than one villain and one victim.

27
 Currency wars could not be ended by relying on the leading
economies in the world to solve them. It requires increased
coordination between every country to stop this “race to the
bottom”.

28
 BIBLIOGRAPHY

CHAPTER 1:
1. The Investopedia Team (2021), Money

https://www.investopedia.com/terms/m/money.asp

2. Elvis Picardo (2021), What Is a Currency War and How Does It

Work?

https://www.investopedia.com/articles/forex/042015/what-currency-
war-how-does-it-work.asp

3. Daniel Liberto (2021), The Wealth Effect Definition

https://www.investopedia.com/terms/w/wealtheffect.asp

4. Adam Hayes (2021), What Are Open Market Operations (OMO)?.

https://www.investopedia.com/terms/o/openmarketoperations.asp

5. Madhuri Thakur (2021), Open Market Operations.

https://www.wallstreetmojo.com/open-market-operations/

6. Nikhil Patel & Paolo Cavallino, FX intervention: goals, strategies

and tactics.

https://www.bis.org/publ/bppdf/bispap104b_rh.pdf

CHAPTER 2:

7. James Rickards (2011), Currency Wars: The making of the next

global crisis (Page 9, Page 44-68)
8. Jonathan E. Sanford (2011), Currency Manipulation: The IMF
and WTO (Page 4-5).

29
9. Alexandra Stevenson (2019), “3 countries cut rates as world
braces for more trade war turbulence”.

https://www.nytimes.com/2019/08/07/business/interest-rates-
india-thailand-new-zealand.html?
fbclid=IwAR1GYq739LYaIZyyyw9bPqvSdQv9WN8DGlf2llL5a
uKokiJ8ezJFxqYWFl8

10. Simon Evenett (2013), Root causes of Currency wars.

Root causes of currency wars | VOX, CEPR Policy Portal

(voxeu.org).

11. Adam Triggs & Warwick J. McKibbin (2020), Global

implications of a US-led currency war (Page 14-15)

US_led_currency-war_final.pdf (brookings.edu)

12. Blanchard, O. (2016). Currency wars, coordination, and

capital controls. National Bureau of Economic Research.
NBER working paper series. Working paper 22388.

Currency Wars, Coordination, and Capital Controls | NBER

13. IMF (2015). 2015 Spillover Report. International Monetary

Fund.

2015 Spillover Report; IMF Policy Paper, June 8, 2015

14. Anora Mahmudova (2015), The events that rocked financial

markets in 2015,

https://www.marketwatch.com/story/the-events-that-rocked-
financial-markets-in-2015-2015-12-22

30
 15. Mike Evangelist & Valerie Sathe (2006), Brazil’s 1998-1999
Currency Crisis.

Microsoft Word - International Finance Paper Final.doc

(umich.edu)

16. James Rickards (2015), A Brief History of Currency Wars.

https://dailyreckoning.com/a-brief-history-of-currency-wars/?
fbclid=IwAR1l796pjkptM6NWsLdyUyiFWSo6zt1sUqXfRNth-
bKfgkrTTU7W7bnN-r0

31