A currency war is when a country’s central bank uses expansionary monetary policies to deliberately lower the value of its national currency. This strategy is also called competitive devaluation. In 2010, Brazil’s Finance Minister Guido Mantega coined the phrase “currency war.”
He was describing the competition between China, Japan, and the United States where each seemed to want the lowest currency value. His country’s currency was suffering from a record-high monetary value, which was hurting its economic growth.
Countries engage in currency wars to gain a comparative advantage in international trade. In a currency war, nations devalue their currencies in order to make their own exports more attractive in markets abroad. By effectively lowering the cost of their exports, the country’s products become more appealing to overseas buyers.
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At the same time, the devaluation makes imports more expensive to the nation’s own consumers, forcing them to choose home-grown substitutes. This combination of export-led growth and increased domestic demand usually contributes to higher employment but faster economic growth.
Economists view currency wars as harmful to the global economy because these back-and-forth actions by nations seeking a competitive advantage could have unforeseen adverse consequences, such as increased protectionism and trade barriers.
