Currency manipulation

Definition

Currency manipulation is the practice of a country artificially affecting the value of its currency to gain an unfair competitive advantage in international trade. This can lead to global imbalances, as it distorts trade flows and investment patterns, contributing to economic instability in other nations. By keeping their currency undervalued, countries can boost exports while making imports more expensive, which can exacerbate trade deficits in affected nations.

5 Must Know Facts For Your Next Test

1. Countries may manipulate their currencies through direct intervention in foreign exchange markets or through policies that affect inflation and interest rates.
2. Common methods of currency manipulation include buying foreign currencies to increase demand for the domestic currency and maintaining low interest rates to discourage capital inflows.
3. The effects of currency manipulation can lead to tensions between countries, often resulting in trade disputes and calls for tariffs or other protective measures.
4. Some major economies, like China, have been accused of currency manipulation, which has led to accusations of unfair trade practices and demands for revaluation of their currencies.
5. Currency manipulation can create volatility in financial markets as investors react to unexpected changes in currency values, impacting global investment decisions.

Review Questions

• How does currency manipulation affect global trade dynamics and the economies of both manipulating and affected countries?
  • Currency manipulation significantly affects global trade dynamics by allowing manipulating countries to make their exports cheaper and imports more expensive. This creates an unfair advantage that can distort competition and lead to trade imbalances. Affected countries may face higher trade deficits as their imports become costlier, while their own exports may struggle to compete in price. This dynamic can lead to retaliatory measures and increased tensions in international relations.
• Evaluate the potential consequences of widespread currency manipulation on international economic stability.
  • Widespread currency manipulation can lead to significant disruptions in international economic stability by creating persistent trade imbalances. When multiple countries engage in such practices, it can result in retaliatory actions that escalate into trade wars, further destabilizing global markets. Additionally, this manipulation can erode trust among nations and complicate diplomatic relations, making it challenging to establish cooperative economic policies that promote stability and growth.
• Assess how currency manipulation practices might influence global policy decisions among major economies.
  • Currency manipulation practices compel major economies to reassess their monetary and trade policies as they react to perceived unfair advantages by others. Policymakers may consider implementing tariffs or restrictions on imports from countries engaged in manipulation as a form of protectionism. Moreover, discussions at international forums, such as the G20 or WTO, often center around addressing these issues to foster fair trade practices. Ultimately, persistent manipulation can drive major economies towards coordinated efforts to regulate exchange rates and create a more equitable trading environment.

Related terms

exchange rate: The price of one currency in terms of another currency, which fluctuates based on supply and demand in the foreign exchange market.

trade balance: The difference between the value of a country's exports and imports, which can indicate whether a country is a net exporter or importer.

quantitative easing:

A monetary policy used by central banks to stimulate the economy by increasing the money supply, which can indirectly influence currency values.