It is not difficult to understand why numerous politicians cherish hope that the favorable currency rate of USD will help the US economy to recover.
Against the background of concerns that the “Japanese disease” may infect the US, any other alternatives are considered impossible or ineffective… or not considered at all. The current political situation in the world together with the growing public debt prevented the US from properly stimulating the economy, as well as from attracting enough investments through various monetary policies. Yet, the devaluation of the US dollar aimed at boosting exports is a risky strategy. Such measures may result in the uncontrollable volatility of the USD currency rate and provoke the rivals’ counter measures. In this particular case there probably won’t be any winner in the “currency war”, everyone will lose the “currency game”.
In order to achieve positive results of economic development countries should cooperate instead of devaluing their national currencies.
Here is Masterforex-V Academy experts’ opinion on the matter:
· The currency wars were started in connection with fears of the 2nd wave of the global financial crisis. Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (IMF), who previously predicted the 2nd wave of the crisis, now feels skeptical about the scenario.
· China was the only state showing slight economic growth during the crisis. Some countries feel a little bit “envious” of China as it has been growing its economic power and becoming a more serious rival in the world arena since then. As a result, the US starts using the proved weapons. So the influential Financial Times ironically blames the US for the currency wars.
· There is a threat to the entire Asia. This time the major target of “the currency war” is the Chinese economy. Japan’s Central Bank previously poured $25B into the currency market to maintain the JPY currency rate versus USD. A range of other Asian countries followed the example of Japan. However it proved ineffective: the South Korean Won gained 5.4% against USD in September, the Thai Baht grew 4.3% while the Chinese Yuan showed a 2% increase against USD. Mastrerforex-V experts note that the United States’ current monetary policy leads to a rise in export prices and a decline in the competitiveness of the released products.
· The US is currently waging a currency war against Asia, particularly against China, while urging it to stop supporting its national currency (Yuan). In its turn China has to respond in such a way because at this point it is trying to secure its national economy. Consequently, China’s national currency is currently being restrained from revaluing. Masterforex-V experts believe that the Yuan has been maintained low to make sure that in case of a rapid increase in the Yuan value numerous Chinese companies won’t go bankrupt, leading to unemployment boom. The Chinese authorities give the West to understand they are not going to leave their currency unprotected. China’s official position is that despite the firm economic growth the country is still not wealthy enough. A swift increase in the Yuan currency rate and consequently a decrease in the competitiveness of Chinese products at the international markets would undermine the welfare of common Chinese people.
What are the consequences and possible results of the currency wars?
Forex experts of Masterforex-V Academy report that numerous world-famous financiers express concerns over the results of the currency wars, including representatives of the World Bank, the International Monetary Fund (IMF) and other global financial institutions. For example, according to Dominique Strauss-Kahn, Managing Director of the IMF, the world community is getting used to the fact that currencies can be used as political weapons. Masterforex-V experts note that such measures threaten the recovery of the global economy:
· The main goal pursued by the participants of the currency wars is to devalue the national currency in order to create more favorable external trading conditions for domestic exporters. Moreover, while decreasing the value of the local currency, the governments promote the rise of import prices to support the domestic producers. The consequences of such activities are that the countries use a range of effective techniques to resist imports, including measures to avoid duties and other restrictions, which require the WTO’s approval.
· The list of the countries currently involved in the currency game is solid: China, South Korea, Japan, Brazil, Taiwan and others. According to the Financial Times report, from Sep 27th till Nov 11th the central banks of Malaysia, Indonesia, Thailand, South Korea,Taiwan and other countries spent $28.74B to avoid the revaluation of their national currencies.
· In its turn the US and EU keeps pressing China urging it to increase the Yuan currency rate, which they consider to be lowered. Since the start of the economic boom China has been actively making use of currency regulation techniques to maintain its export position at the international market while accumulating its gold and currency reserves. Even though in June 2010 the People’s bank of China canceled the peg to the dollar and announced a more flexible way of forming the Yuan currency rate, since then it has risen only 2% against USD. China really “stands out in a crowd” in terms of imbalance of currency rates. It has recently accumulated its currency reserves to a new record volume of $2.65 trillion. China’s currency “appetite” may do itself and the entire world a bad turn. The volume of its currency reserves is so huge, that their considerable reduction may turn out to be shocking for the global market.
· Feeling helpless to influence China’s economic policy, the US went to extremes, i.e. in the first reading American legislators approved a bill allowing the US government to apply for holding anti-damping investigations and to impose duties on the products imported from the countries which devalue their national currencies, Masterforex-V Academy experts say. If the bill becomes a law it will provide an opportunity to impose defensive duties on imported Chinese products.
The US authorities criticize other governments for devaluing their national currencies while in reality they secretly devalue their dollar:
At Forex the USD index keeps declining in value. According to the experts of the Department of studying Masterforex-V trading system , at this point the index price is moving within the scope of wave c(C ) of level W1. In order to change the mid-term tendency the price rate needs to get over the defensive MF pivot and to come out of the MF Sloping Channel.
USD index chart
Support/Resistance levels:
70.05 – MF Sloping Channel
78.455 – MF pivot
76.955 – the current price (at the moment of writing the article)
73.496 - MF + 138.2% + 176.4%
71.345 – Fractal-Zigzag Reversal (FZR)
Howard Friend, the Swiss-based MIG bank’s leading economist, notes that the developing countries blame the US an EU for maintaining very low interest rates, which leads to speculative capital inflow. In order to avoid inflation they do their best to block the inflow. Let’s take Brazil as an example. In 2009 its national currency set a record in terms of revaluation pace. So it has recently announced an increase in the taxes imposed on the investments in the public securities with a 4-6% fixed yield. Thailand has introduced a 15% tax on the repatriation of the revenues gained from investing in the country’s public debt.
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