It’s been very obvious in the past few years, that in the shadow of the global crisis, a great many countries have taken an extremely hard stance in regard to the valuation of their currencies. It’s been described as an ‘every man for himself’ type of scenario, where policies introduced by ministers serve only to make the situation worse for everyone. Some countries are benefiting from this however. In particular, many experts believe that the strategy of devaluing currencies across the world has helped the dollar to some extent.
The idea behind devaluation is of course that it helps to boost exports and decrease imports. This should in theory stimulate the economy. The problem is that when a great number of countries do this, trade is impacted very negatively, and ultimately nobody benefits.
The simplest way in which countries can devalue their currency is to sell it off. South Korea recently bought $1 billion in foreign currencies in order to halt the rapid increase in the won’s value. Switzerland has also recently made sure that the franc tracks the euro at 1.20 in a bid to keep exports strong. This is of course a lot easier than attempting to raise value, which requires the sale of held foreign currencies or bank borrowing.
One very obvious statistic that reveals just how prevalent devaluation is, is that according to the IMF
, the total amount of foreign reserves held in the world’s central banks has grown by almost $4 trillion since 2007.
Competitive devaluation is limited in terms of the length of time it will be effective for. This can clearly be seen with Japan, who have recently struggled to keep the yen from rocketing. As the measures have failed to provide a long term solution, some Japanese ministers, including the Prime Minister, have accused the US and Eurozone regulators of exasperating the situation by lowering their own interest rates. The US argues that its aim is simply to boost the economy, and that devaluation of the dollar is not desirable.
All of the devaluation attempts create opposition between currencies, and each will react accordingly, with everyone losing out. The issue however is that the dollar dominates world markets to such an extent that it is very difficult to devalue competitively. There are too many market players.
So how does all of this benefit the dollar? Unpredictable and widespread devaluation can potentially make investors of all scales nervous. With the dollar the currency most resistant to devaluation, it becomes somewhat of a haven. This trend should continue for a while yet, with no real competition coming from the currency of emerging countries such as China and Brazil. Your forex trading account
is unlikely to offer the CNY or BRL, simply because the Chinese market is too strictly regulated, and Brazil’s currency is nowhere near stable enough. As long as the rest of the world continues to competitively devalue currencies, the dollar should remain dominant.