Recently, the global currency war has become a hot issue to most of the people and has been making headlines around the world. As we can see, most of the headlines of the newspapers and magazines like the Financial Times, Telegraph and The Economist are about the currency war. On 27 September, the Brazil’s finance minister, Guido Mantega was the one who declared that “an international currency war has broken out and this happens because governments around the globe now are competing against each other to depreciate their exchange rate in order to boost competitiveness” (Financial Times, 2010). For example, countries like South Korea, Japan and Taiwan are putting effort into lowering their currencies. However, the main attention was given to the two economic superpowers; China and United States of America. Today’s global currency war happened two years after the global financial crisis 2008 and it involved mainly China and USA. Why is the currency war happening? The causes and effects of the currency war will be mainly focused and discussed below.

There are several factors that need to be considered to the causes of the currency war. Firstly, countries like Japan have carried out an explicit currency intervention or monetary easing in the exchange market and this causes their currency, yen, to be weakened and remain low against other major currencies. Other countries like Brazil and South Korea have also done the same. Their currencies appreciation have stopped because they have been doubling up the taxes on capital inflows in order to maintain their values of currencies low to boost their exports. If their currencies are lower, the demand for export will go up because it will be cheaper for other countries to purchase their exports. When most developing countries favored the depreciation in their currencies, other currencies like the euro and US dollar will tend to appreciate. This will cause a problem for the European government to control their finances as they are already in a troubled-state.

Secondly, the financial crisis that happened at the end of the year of 2008 has caused United States’ economy to be in a deep recession and actions have been taken by the US government to crawl out of the recession. Currently, the United States is still in its economic recovery state after the crisis but the high rate of unemployment has worsened its recovery. This is why US focused on China’s unwillingness to let their currency, yuan depreciate. The currency war between China and USA then started when the US government blamed China for not letting its currency appreciate. The US treasury secretary, Tim Geithner said that China has created “a dangerous dynamic of competitive non-appreciation in emerging economies because China refused to raise its value of yuan” (The Economist, 2010). There were some analysts who insisted that the depreciation of yuan was the major reasons for the US slow economic recovery as yuan is traded up to 25% below its true market rate in which the Chinese exporters were given unfair advantage. T