Currency manipulation is the act of changing its value against other currencies instead of leaving it free to fluctuate based on market dynamics.
This can be done by fixing the exchange rate or deliberately increasing or decreasing its value.
This practice is usually frowned upon since it results in an artificial distortion in currency prices. In fact, it is considered an illegal practice based on US laws and international agreements.
This could also give way to unfair trade advantages since artificially devaluing a country’s currency could make its exports relatively cheaper and more attractive. In the long run, this could eventually result in a global trade imbalance.
What is currency manipulation?
Currency manipulation is a controversial economic strategy employed by governments or central banks to intentionally influence the value of their country’s currency relative to other currencies.
This practice can be used to achieve various economic objectives, such as boosting exports, controlling inflation, or managing debt. However, it can also lead to accusations of unfair trade practices and tensions among trading partners.
Some countries have enacted legislation targeting currency manipulation, such as the United States’ Currency Exchange Rate Oversight Reform Act, which allows for the imposition of countervailing duties on imports from countries deemed to be manipulating their currencies.
How does currency manipulation work?
Currency manipulation, also known as currency intervention or exchange rate manipulation, is the deliberate intervention by a country’s government or central bank in the foreign exchange market to influence the value of its currency.
This is typically done through the buying or selling of foreign currencies or assets denominated in foreign currencies.
By intervening in the market, a country can cause its currency to appreciate or depreciate, depending on its economic objectives.
Here are some techniques used in currency manipulation:
- Direct intervention: A central bank or government may buy or sell its own currency in the foreign exchange market, using its foreign currency reserves. This increases or decreases the supply of the domestic currency, affecting its value relative to other currencies.
- Indirect intervention: A government may use other policy tools, such as interest rates or capital controls, to influence the value of its currency. For example, lowering interest rates can cause a currency to depreciate by reducing demand for assets denominated in that currency.
- Coordinated intervention: In some cases, several central banks may work together to manipulate currency values in a coordinated manner, often to address a global economic crisis or to stabilize a particular currency.
What are the effects of currency manipulation?
- Boosting exports: By devaluing its currency, a country can make its exports more competitive in international markets, thus stimulating economic growth and job creation.
- Reducing imports: A weaker currency can make imports more expensive, leading to a reduction in imports and a shift toward domestic production.
- Controlling inflation: A stronger currency can help control inflation by lowering the cost of imported goods and services, as well as reducing the pressure on domestic producers to raise prices.
- Managing debt: A weaker currency can help a country manage its external debt by reducing the real burden of debt repayments in local currency terms.
- Unfair trade practices: Currency manipulation can be viewed as an unfair trade practice by other countries, leading to trade tensions and retaliatory measures.
Currency manipulation is a controversial issue with significant economic implications. While it can provide short-term benefits for the manipulating country, it can also lead to global trade imbalances, distortions in resource allocation, and international tensions.
Various international organizations and agreements, such as the International Monetary Fund (IMF) and the World Trade Organization (WTO), aim to promote currency stability and discourage manipulation. These organizations monitor exchange rate policies, provide policy advice, and facilitate international cooperation on currency issues.