SUBMITTED BY:

Ehsan Afzal MB083086

DATE:-04 JAN-2011
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CURRENCY WAR Basic introduction:

Currency war, also known as competitive devaluation, is a condition in international affairs where countries compete against each other to achieve a relatively low exchange rate for their home currency, so as to help their domestic industry. According to financial journalists, a global currency war has broken out in 2010. In general senior policy makers and journalists have suggested the phrase "currency war" overstates the extent of hostility, though there is a risk of further escalation. While many states have experienced undesirable upwards pressure on their exchange rates and taken part in the on-going arguments, the most notable dimension has been the rhetorical conflict between the United States and China over the valuation of the Yuan. Movements in the currency markets and their effects on different economies are complicated, like a three-dimensional chess game. And because the U.S. and its dollar have been the worlds leading economy and currency for so long, few of us have needed a working knowledge of foreign exchange. Today its different: as the Federal Reserve and central banks of other developed economies have lowered interest rates in its fight to save the U.S. economy, the worlds currency markets have become distorted. The result is a many-sided battle of the emerging economies against the U.S., one that without some sort of cooperation will wind up with most everyone losing, in terms of a slow global economy. So far, the winner seems to be China. The currency war of the 1930s is generally considered to have been an adverse situation for all concerned; with all participants suffering as unpredictable changes in exchange rates reduced international trade. The 2010 outbreak of competitive devaluation is being pursued by different mechanisms than was the case in the 1930s and opinions among economists are divided as to whether it will have a net negative effect on the global economy. A second flashpoint is the rich worlds monetary policy, particularly the prospect that central banks may soon restart printing money to buy government bonds. The dollar has fallen as financial markets expect the Federal Reserve to act fastest and most boldly. The euro has soared as officials at the European Central Bank show least enthusiasm for such a shift. In Chinas eyes (and, sotto voce, those of many other emerging-market governments), quantitative easing creates a gross distortion in the world economy as investors rush elsewhere, especially into emerging economies, in search of higher yields.
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Global Currency War: What It Means, And What To Do About It China is sitting on a massive pile of fiat currency totaling over $2.45 trillion. Should the country stop buying a particular currency, it would send a strong bearish signal to the market as would selling any particular currency. China, while a creditor nation, has boxed them into a corner when it comes to the future composition of their foreign reserves; perhaps that is why they now own 1054 tons of gold. Here's a look at their reserves and their debt situation

Factors that affect currency:

1. Japan, Switzerland, South Korea, Taiwan and Brazil, among others. Now consider China, the worlds second biggest economy. Because the Yuan doesnt trade freely in the world markets, and China has sold zillions of Yuan to keep the price low, economists calculate that the Yuan is about 20 percent lower than it would be otherwise. This gives China a tremendous advantage in exporting against other countries, even other emerging markets that have low wages and therefore fairly cheap merchandise to sell on the world markets. That low currency price is taking business away from lots of other countries, says Fred Bergsten, director of the Peterson Institute for International Economics:

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