Currency Wars: Q&A

Brazil was first to go on the attack last month Photo: Bloomberg News

Q Just what are these “currency wars” all about?

A Countries are being accused of manipulating their currencies to make imports expensive and domestic goods cheaper in an effort to create jobs. Brazil was first to go on the attack last month, implying the US, Europe and Japan are deliberately devaluing. The US then turned on China, claiming the Asian giant was not letting the yuan rise freely. China hit back, saying the US is depreciating by stealth.

Q So, how are they doing it?

It’s easiest to see in China. The Asian giant pegs the yuan to a basket of currencies rather than letting markets set the exchange rate. It is allowing the yuan to appreciate slowly – but not fast enough for the US. China also uses capital controls, limiting the amount of foreign capital coming into the country. By restricting demand, the currency is kept artifically low. Japan’s government last month intervened by selling yen to buy $20bn of dollars – manipulating demand and supply. Europe, the US and the UK have slashed interest rates to near zero and have been “printing money”. By reducing the return on assets, demand has fallen. And by increasing the amount of money in circulation, supply has risen. Taken together, the effect is to reduce currency values… Regcure

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