Currency war, also known as competitive devaluation, is a condition in international affairs where countries compete against each other to achieve a relatively low exchange rate for their own currency. As the price to buy a particular currency falls so too does the real price of exports from the country. Imports become more expensive too, so domestic industry, and thus employment, receives a boost in demand both at home and abroad. However, the price increase in imports can harm citizens' purchasing power. The policy can also trigger retaliatory action by other countries which in turn can lead to a general decline in international trade, harming all countries.
Reasons of Currency War Between USA and China:
Competitive devaluation has been rare through most of history as countries have generally preferred to maintain a high value for their currency,but it happens when devaluation occur.
China keeps its dollar artificially low so that countries like the US will buy its goods. China is the US's largest trading partner and if they didn't sell their goods for super cheap, markets like India would be able to under cut the Chinese and then the US would buy goods from Indian instead of China. There is so much trade between China and the US that China profits immensely without needing it's Yuan to appreciate. This of course hurts the average Chinese person in that their labour is devalued but it beneficial for the country as a whole as it has quickly become a super power economicaly.
In 2008, a trader paid one Ghana Cedi for one U.S. dollar, but at the beginning of April 2012, the same trader travelling to Dubai paid GH¢1.74 for one U.S. dollar.
This means that year-on-year decline in the value of cedi against the US dollar was 74 per cent over a three-year period.
A point to note is that during the global economic crises of 2008-2009, the cedi depreciated by 25 per cent against the dollar.
Between 2010 and 2011, the cedi again depreciated 18.5 per cent against the US dollar. For last month, the cedi exchange rate depreciated 4.29 percent against the US dollar.
So is the current downward slide in the cedi value as a result of the slowdown in the global economy or due to internal structural weaknesses? This question requires a detailed research work beyond the scope of this article but it is a very relevant question to ask at this time.
In economics, depreciation is basically the symptoms of an underlying problem, specifically imbalances in the Balance of Payment (BOP), emanating from excess demand for dollars. So instead of discussing the depreciating cedi, I will rather focus my attention on the causes or factors that cause currency to depreciate and what the government can do to arrest this problem in special cases.
Before then, I must let readers know the difference between currency fluctuation and depreciation. Fluctuations in currency value are a common event and are usually no cause for concern. The minor daily increases and decreases in value are generally due to “random walk” and not due to an economic event or fundamental problems.
However, changes in currency value become significant when the decline in value of the currency is an ongoing trend. Technically, when currency depreciates, it loses value and purchasing power, with impact on the real sectors of the economy.
Although, the economic effects of a lower cedi take time to happen, there are time lags between a change in the exchange rate and changes in commodity prices.
Factors that determine the value of a currency include the current state of the overall economy, inflation, trade balance (the difference between the value of export and import), level of political stability, etc.
Occasionally, external factors like currency speculations on the foreign exchange market can also contribute to depreciation of the local currency....