CHAPTER ONE:
INTRODUCTION
- Background to the Study
Whenever we think of war, it is easy to imagine the involvement of soldiers and the presence of guns, tanks weapons of mass destruction etc. and a chaotic war situation. In another stead, when we think of trade transactions, exchange rates, currency and currency policies, it becomes difficult to think of war because they are instruments of economics. But in a situation whereby countries use currency as weapons during conflict, it is referred to as „Currency war‟. The term “currency war” was coined in September 2010 by the then Brazilian Finance minister Guido Mantega, who first raised the eyebrow of the public about the currency war. It is a new terminology that is used in place of “competitive devaluation” of international currencies. According to general economic studies, competitive devaluation refers to a condition in international affairs where countries compete against each other to achieve relatively low exchange rates for their respective currencies, as the price to buy a particular currency falls so does the real price of exports from that country (Burda and Wyplosz, 2005). Although imports become more expensive, the domestic industry as well as local employment receives a great boost as a result of preference of the citizens for locally produced goods (Brown, 2010). However, consistent devaluation of currency on the long run could harm the purchasing power of the citizens and could provoke and trigger retaliatory action by other countries which in turn can lead to a general decline in international trade thereby harming all countries. Basically, in
competitive devaluation, a country only gains temporary advantage until the next country devalues its currency exchange rate as well.