The Case of Usd Vs Cny
Jean-Benoit CAZE
Max RANGER
The currency war:
CNY vs USD
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Promotion 2014
Due date: 31st of March 2014
Introduction
Currency war; Origins and Definitions
Definition
The "Currency War "; what does that mean?
The “Currency war ", or " exchanges war " is the battle that are engaged the countries of the whole world to be the as competitive as possible, via economic policies - in particular monetary - who allows them to lower the level of their national currency compared with the other currencies. In reality, it is a question of practicing what we call a competitive devaluation.
· Why do we speak about "war"?
It is the Brazilian Minister for Finance Guido Mantega, whom, on September 27th, 2010, exceeded by the too strong Brazilian-real which fills its economy, spoke about “currency war ". Although exaggerated, the term had straightaway an international and media success. In reality, the devaluation exists for several centuries and, in the world economic history, the use of this weapon was commonplace.
The role of Banks and Central Banks
The banks
Who buy or sell currencies for their account or for that of them client are the main. They have trading rooms where the traders stir, but also software which, automatically, thanks to complex algorithms handle thousands of orders within one minute. Recently hedge funds , insurance companies, investment companies are allowed to play the game.
The main exchanged currencies are $, the euro and the yen. The currencies of emerging countries made their entry to the FOREX but are still difficult to exchange.
- The central Banks
Acting within the framework of the monetary policy. Nowadays , the policy practised by most of the central banks, consists in injecting massively liquid assets on the market, in other words, they make some monetary creation. Their policy is expansionist. For what advantages do they expect from it?
The POLITICS of the CENTRAL BANK
Why the EUROPEAN CENTRAL BANK is the only one to use very economically the monetary creation to boost the exports and the European growth ? Why does it let the euro revalue?
While certain central banks among the most important, as that of Japan try to influence the course of their currency , the ECB maintains its orthodox position. " To maintain a target of low inflation is a major way to moderate the variations of exchange rate " It is moreover the only objective that the ECB has to perform, which has no explicit mandate to intervene on the foreign exchange markets.
The objectives:
Contrary to the FED, it has not for mandate to support the economic growth.
Its only objective is the fight against the inflation. Yet any injection of additional liquidity would risk to generate an increase of the demand. The demand of goods would become superior to the offer and the prices would rise: it would be the inflation. What the ECB wants to avoid. But, in so doing, it returns the rare offer of Euros and thus the value of this currency increases. It is a not wanted, but automatic consequence. Indeed, in front of currencies with which the value does not stop falling, the euro seems solid, it attracts the investors and the speculators. The demand of euros is superior to the offer what generates its appreciation.
The specificity of the Euroland:
Another problem which owes To face the ECB, is the very big diversity of European economies.
For certain countries of the Eurozone, as Germany, the appreciation of the euro does not impact on export. In spite of the overvaluation of the euro, Germany remains the second world exporter because its competitiveness is not base on the cost of products but on their quality for which buyer are ready to pay a higher price.
Furthermore, Germany is chiefly afraid about the inflation. The first European economy is capable of making her voice heard and is able to direct the decisions of the ECB in the sense of a strong currency as was it the Deutschmark.
On the other hand, the countries of the South and east which look for the competitiveness by the costs are very handicapped by the overvaluation of the euro which slows down their exports and thereby their economic growth.
" More than ever, I believe that the exchange rates should reflect fundamental economic ", declared the ex- president of the institution, Jean-Claude Trichet.
This kind of policy lead by the ECB, certainly brave, is that dangerous?
The decrease of the currency’s value: origins
Why did the FED inject 600 billion dollars? Why the Chinese persist in maintaining Yuan as low as possible? Why the bank Did power plant of Japan intervene to avoid an increase of the Yen? Actually, the currency became a weapon... What can be the advantages of a low currency?