Currency Manipulation

 The term Currency manipulation is a label given by the United States of America. It is the process when a country lowers its currency to have a competitive advantage in the world market. Currency manipulation can also be explained as weakening the value of their domestic currency by themselves to earn foreign currency in return. According to the United States, it is an inappropriate way of earning foreign currency in the foreign market. The devaluing of a nations currency attracts a lot of foreign buyers and hence the exports of the same nation increases, leading to an increase in the foreign currencies. As per the United States Department of Treasury, currency manipulation is an unfair currency practice that allows one to have advantages from trade.

 

Manipulation is the process when a manipulator tries to influence the market price by artificially lowering or increasing the price of an asset. The process is seen in many forms. We know that a currency is an important factor in trading and valuing these currencies in the international market is the most important phase of trading between the countries. However, a domestic currency goes through many different phases, like; Revaluation, devaluation, depreciation, and appreciation of the currency. To know these terms one needs to know about the exchange rate and its types.

  • Exchange Rate: It is the price of one domestic currency in terms of other foreign currency. For instance, the value of one dollar is 76 rupees. Therefore, buying a cream produced in the United States will involve two transactions. One using rupees to buy dollars, second is to use these dollars to buy the cream. Exchange Rate has the following two systems:
  • Fixed Exchange Rate System; In this system, the government tries to maintain a fixed currency value against gold or a specific currency. The main purpose of a fixed exchange rate system is to keep a currencys value narrow. This also helps the government in maintaining low inflation. There are two possibilities under a fixed rate system.
  1. Revaluation of Currency: An upward change or an upward lift in the domestic currency with response to a baseline is known as Revaluation. Here the baseline can be a fixed wage rate, gold, or any foreign currency. Thus, revaluing currency increases the demand for imports in the country.
  1. Devaluation of Currency: It is totally the opposite of the Revaluation of currency. Therefore, it is a downward adjustment in the domestic currency in response to other foreign currency, gold, or fixed wage system. Thus, devaluing a currency causes inflation which simultaneously increases the demand for exports and higher growth.
  • Floating Exchange Rate System; In this type of exchange rate, currency tries to fluctuate or changes in response to the foreign exchange market. It depends on the supply-demand forces of a market and is totally different from a fixed exchange rate system. Unlike, fixed exchange rate system, this system predominantly determines the rate. Similar to fixed exchange rate system, floating exchange rate system also has two following possibilities:
  1. Currency Appreciation: A lot of people misunderstood the term as an increase in the value of the securities. However, currency appreciation means when the value of one currency increases in response to another. It gains value against the currency it is being traded. Here, we also know that currencies are traded in pairs. It is related to the supply and demand of the foreign market and generally increases against each other due to interest rates, trade balances, business cycles, government policies, and many more.  A currency appreciation in a country leads to cheaper imports and export cost rises.
  2. Currency Depreciation: A fall in the value of the currency in floating exchange rate or it is a decrease in the value of one currency in response to another, due to demand and supply of the foreign exchange market. Currency depreciation can attract a lot of foreign buyers, as the exchange rate is lower than other currencies. This leads to cheap exports from the country.

Now that we know the meaning of floating and the fixed exchange rate system, we clearly can understand the meaning and process of Currency Manipulation. But now the question is= How does a country manipulate its currency? 

The answer to this question is very simple: the government of a country uses currency manipulation to increase the amount of foreign currency in the country. The government with the help of the national/central bank artificially lowers the value of their domestic currency. Which further, lowers the cost of their exports and encourages other countries to buy from them. Which theoretically brings foreign currency in the market and a competitive edge of the country in the foreign exchange market. Altogether it sells its currency to buy foreign currency. Therefore, it decreases the domestic currency demand while increasing the demand for foreign currency. The USA has declared China as the manipulator.  Chinas currency yuan has been devaluating itself in the foreign exchange market and has been gaining an unfair advantage in trade. This encourages a lot of imports from China by the different nations as Chinas exports become cheap, compared to other competitive countries, like the USA. This also gives China a competitive edge in the foreign market. Therefore, leading to several other big nations being in trouble. Hence, Currency manipulation can be healthy for one nation (China in the above example) but can cause adverse negative effects on another country (the USA, in the above example).

 

There can be several reasons for manipulating currencies. Controlling inflation, maintaining a competitive edge over others in the financial market, and financial stability, are some of the reasons that a country manipulates its currency. Therefore, I believe that this unfair means of practice isnt always unethical. Currency manipulation becomes hypocritical. The government of a country thinks for their country and the running competition. Sometimes, to cover up some serious situations like inflation, they opt for currency manipulation. It depends upon the situation of a country.  The competition of goods and services between the countries is now changing to a competition of currency. The war of currency in the trade market will transform and impact many countries that are stimulated with international trade.