Currecy Wars

World is yet to recover from the detrimental Financial crisis. The growth is too sluggish in US and European Union. Now as everyone believes worst had already passed. Still the shock waves of Financial Tsunami is haunting many governments. It has started a new war among nations over exchange policies. There are two kind of exchange rate policies - 1. Fixed exchange rate which is controlled directly by the government . 2. Market driven exchange rate. Still in the later policy the government and central bank plays vital role.

Signs of the crisis :
Japan coming forward to stop the appreciation of its currency . The emerging markets like Brazil taking monetary steps to control and restrict FDI's. Benchmark in Indonesia and Philippines had hit record levels.

What has triggered the currency wars ?
There are mainly to camps developed countries led by us and developing countries led by China , India and Brazil. Each camp is blaming other for he crisis. The view point of developing countries-Us treasury and Fed is pumping large volume of currency in the market to trigger the growth in US economy. But since the confidence in US domestic market is very low especially because of the high rates of unemployment in US and under performance of the economy . Where as the developing country like China having a 2 digit growth rate and closely followed by India and Brazil. All these is making the emerging economies very attractive for the foreign Investment. The FDI flows in emerging economies are at record level. The crisis of 1999 which made the Asian giants to bleed is still fresh in memory. Excessive flow of dollar in the economy will cause the domestic currency to appreciate and it will lead to fall in export and the large inflation rate. The stock market , real estate and asset price are government bonds are sky rocketing and can lead to another bubble in emerging markets. The Asian crisis of 1998 had exposed the dangers of large volatile FDI inflows already.

Asian crisis 1998 - It all started as ASian MIRACLE model with huge FDI inflows which dramatically increased the asset prices. The economy got bubbled by the hot FDI inflows.High asset price later on caused the investors and companies to default on their credit and later on this created panic among the investors. Foreign investors started to take out huge volume from the Asian markets. This increased the pressure on domestic currency. Banks and government tried to uphold the exchange rates but finally they had to give . It caused major depreciation in the exchange rate . It made the foreign currency dominated liabilities substantially high in term of their domestic currencies leading to further collapse and bankruptcy. Final IMF had to come to rescue of Asian tigers. But the terms and condition of IMF bailout was very harsh.
As a result even today emerging economies are very cautious about appreciation of their currencies.

The other camp led by US argue that it is China who is responsible for global currency imbalances. It is China which is upholding the rate of its currency and hence creating the crisis.
In my opinion both US and China are the epicenter of this earthquake which is detrimental to emerging economies. US is pumping more money and China is not absorbing its share of global shock waves.

Who is winning the war ?
Presently both US and China are in comfortable positions. Emerging markets are going to be the worst hit by the war. China is able to keep it currency at constant rate against dollar and it has depreciated against Euro. But in the long everyone is going to lose.

Whats the solution ?

There is no easy answer. But that, unfortunately, is a fact of life when the world has been living in such an unbalanced way for years. A rate hike in the United States might squash economic growth and leave the world facing another dip. A rapid China revaluation could price the country’s exporters out of the market and lead to widespread unemployment.A gradual but sustained revaluation of the yuan versus the dollar — combined with a halt to the dollar’s own depreciation — is the least bad way forward. Reforms in international institution like IMF,G-20 and World Bank is a huge step in right direction. These institutions need to represent the realities of present era. Greater voting right share and representation should be given to emerging economies . These institution can be the platform to find a middle amicable solution to such problem if and if the represent the realities of 21st Century.

Lets hope the next meeting of G_20 can bring some agreement on the exchange rates.