Currency Manipulation | Article

Added on - Oct 2019

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Topic: Currency ManipulationCurrency is one of the important media of exchange when two countries trade or establish businessrelations among one another. The value of a country's currency is thus an important factor whichdetermines the amount of foreign trade. This provides an incentive forcurrency manipulationswhich can help improve the exports and thus the balance of trade. The aspect of currencymanipulation is not legitimate but can be accomplished in some strategic ways which are within thelegal norms.Currency manipulationis also known as currency interventions which are accomplished through amonetary or fiscal policy of a country. In such an intervention, the government sells or buys foreigncurrency in exchange for the currency of their own country. Such activity influences the exchangerate among the two currencies and leads to the desired situation.Some of the experts indicate thatcurrency manipulationis foreign exchange market interventions,which is important to boost the foreign operations of an economy while others think that suchinterventions disturb the normal trade operations. There are various economic units in a countrywhich is interested incurrency manipulationsand wants to set a target which helps boost theirbusiness activities. The government and the policymakers in a country also has a set of objectiveswhich are fulfilled through currency manipulations. Some of these objectives are as follows:Regulating Inflations- One of the reasons why countries and the government resort tocurrency manipulationsare to regulate the rate of inflation and price rise. The exchangerate of the home country about a foreign country leads to changes in the inflation rate for anopen economy.Improvement in the exports and foreign trade relations- One of the reasons for which thepolicymakers may choose to intervene or conductcurrency manipulationsis to improve thelevel of exports or foreign trade. Such interventions help to establish the rate in a mannerthat the home country products are cheaper in the foreign market. This helps to builddemand in the foreign market and improve sales. When the home currency is too strong, itmakes the goods costly in a foreign country. Thus it is necessary to intervene and correct thesituation.Economic growth- Another major reason for which the countries might intervene or conductcurrency manipulationsis for boosting the economic conditions of a country. When the rateof exchange is set at a rate which attracts foreign investments, it helps in the economicdevelopment of the country. Thus the developing and the under-developed countries mightfind it attractive to go for currency manipulations and improve the growth rate for a certainperiod.Strategic development of important sectors of an economy- The government and thepolicymakers of a country may be interested in thecurrency manipulations, for improvingthe strategic sectors of an economy. There are various sectors which cannot be growthindigenously and are dependent on foreign trade. Through the estimated rate of foreignexchange, these sectors may get a direct boost.Response to foreign depreciation- Sometimes, the government of a country may beinterested in currency manipulation as a response to foreign currency depreciation or otherchanges in foreign currency. The central bank may find that the home currency has becomeout of sync with the economic growth rate of the country and maybe having adverse effects.Improve trade deficit- Another reason why the countries use currency devaluation is toimprove their positions of trade deficit. As a result of currency devaluation, the imports of a
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