Some economists predict that currency wars will be commonplace around the world in the near future. In a nutshell, a currency war is a policy adopted by a few central banks in parallel to devalue their national currencies. Each of them pursues the goal of stimulating its domestic economy.
Experts warn that the new US President who will replace incumbent US leader Joe Biden will set the trend. The new administration could make determined efforts to weaken the US currency. Latin American countries will quickly follow suit because their economies depend on the US dollar’s forex rate. Moreover, the same fate lies ahead of the Hong Kong dollar and the UAE dirham.
Later on, China, Japan, and South Korea will also be involved in currency wars. Analysts reckon that the EU monetary authorities will refrain from the deliberate devaluation of the single European currency because they will have to curb soaring inflation through the opposite policy of reinforcing the euro against the US dollar. This measure will be appropriate to support European manufacturers running their businesses inside the euro area.
Countries devalue their national currencies because merchandise manufactured or commodities produced inside this country become cheaper for overseas buyers. In other words, this practice encourages exports, boosts the incomes of domestic exporters, and increases tax revenue in the state budget. In turn, with more expensive imports, demand for imported merchandise declines. On the plus side, the undervalued currency gives a competitive advantage to local manufacturers.
The other side of the coin is that a currency war poses serious risks to a state and could entail unintended devastating consequences. A currency war might get out of control of a central bank, thus playing havoc with the banking sector and putting a heavy strain on local consumers. All in all, economists view currency wars as harmful to the global economy as they set the stage for global financial upheaval.