Let’s face it – the entire world is on the brink of currency wars. Countries are on the verge of having nasty confrontations on the issues related to exchange rates and currency devaluations. The exchange rates affect the trade policies and the attitude of the traders towards the flow of capital. Currency wars have been affecting every nook and corner of the world. By everyone would have noticed the restrictive new restrictions have been levied on people in South Korea, Thailand, Iran and Brazil. Sentiments against foreigners have also been rising everywhere due to currency wars. These events have also affected the support of public for the economic globalization and a global development perspective. The situation is getting out of control and causing disastrous impacts on the economy of the world.
The prime issues concerns with some countries that hold the exchange prices at undervalued rates. They almost cheat on other countries. This gives a boost to the exports of such countries and limits the imports. But exactly who is responsible for this latest currency war? China is considered to be the main culprit for this situation and is held responsible for currency wars followed by the International Monetary Fund (IMF). In broader terms, this situation has become even more serious because Europe has refused the reformation of the global economic governance. It was compounded by several years of mismanagement of financial issues in the United States of America.
China is definitely responsible for currency wars. Ten years ago, China kept accumulating huge amounts of reserves from foreign countries by running trade in surplus. It intervened and bought up huge sums of greenback and generated interests. In many countries, such an intervention pushed up inflation as local currency is issued by the central banks by returning the dollars. As the financial system of china remains controlled tightly, the investors get to have very limited options. According to the principles, International Monetary Fund should press the countries that undervalue their currencies and let them appreciate. But in the real world, the IMF cannot control china or any other country which has current account surplus.
The west Europeans have also been playing a significant role here as they are over-represented on the executive board of the International Monetary Fund. They straightaway refuse for consolidation of their seats to have higher influence on the emerging markets. This apathy ensures that the markets of these emerging countries are forever dependent on the International Monetary Fund for financial aid.
The economic dangers faced by the world today can also somewhere attributed to the under-performing policies of the United States of America. There are three main reasons due to which America can be held responsible for these threats. The first and the foremost reason is that the new emerging markets feet that their currencies are being pressed just to appreciate the inflows of the growing capital. Second reason is that the elite political class became highly comfortable with the habit of over consumption due to the current account deficits. Third reason lays stress on the account surpluses in the third world markets.
The currency wars are skirmish and the setbacks are faced by the entire financial system of the world. The system has transformed into an unstable entity resulting in abrupt volatilities in major markets especially the Forex market. Authoritative risks are being taken recklessly that will eventually see demise of the fair trade system established between countries.
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