Currency Manipulation: The Process and Steps

The entire idea of currency manipulation is not legitimate but can be accomplished in some strategic ways that are within the legal norms. This is one of the most demanding and interesting topics in economics, international relations, finance, and other subjects related to business.

As we know, currency works as one of the key mediums of exchange between two country’s trade or establishing business relations with one another. This indicates that the value of a country’s currency is an important factor that determines the amount as well as the role of foreign trade agreements. This spurs currency manipulations which can help improve exports and thus the balance of trade.

This blog, planned and written by an expert at allassignmenthelp will shed light on the concept of currency manipulation in detail to help students get a better idea of it.

What is Currency Manipulation?

Currency manipulation is also known as currency interventions which are accomplished through a monetary or fiscal policy of a country. In such an intervention, the government sells or buys foreign currency in exchange for the currency of their own country. Such activity influences the exchange rate among the two currencies and leads to the desired situation.

Some experts indicate that currency manipulation is a foreign exchange market intervention, which is important to boost the foreign operations of an economy while others think that such interventions disturb normal trade operations. There are various economic units in a country that are interested in currency manipulations and want to set a target that helps boost their business activities.

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Why is There a Need for Currency Manipulation?

The government and the policymakers in a country also have a set of objectives that are fulfilled through currency manipulations.

Some of these objectives are as follows:

Regulating Inflations

One of the reasons why countries and governments resort to currency manipulations is to regulate the rate of inflation and price rise. The exchange rate of the home country about a foreign country leads to changes in the inflation rate for an open economy.

Improvement In the Exports and Foreign Trade Relations

Another reason for which the policymakers may choose to intervene or conduct currency manipulations is to improve the level of exports or foreign trade that impacts international trade (competitiveness, exports, imports). Such interventions help to establish the rate in a manner that the home country products are cheaper in the foreign market. This helps to build demand in the foreign market and improve sales.

Economic growth

It has a direct effect on domestic economies (inflation, unemployment) as well. Another major reason for which the countries might intervene or conduct currency manipulations is to boost the economic conditions of a country. When the rate of exchange is set at a rate that attracts foreign investments, it helps in the economic development of the country. Thus, the developing and the under-developed countries might find it attractive to go for currency manipulations and improve the growth rate for a certain period.

Strategic Development of Important Sectors of An Economy

The government and the policymakers of a country may be interested in currency manipulations, for improving the strategic sectors of an economy. There are various sectors that cannot be grown indigenously and are dependent on foreign trade. Through the estimated rate of foreign exchange, these sectors may get a direct boost.

Trade policies and currency manipulation are highly linked with each other and shape a country’s ties with its own regions as well as other nations.

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Read Here: Revenue Expenditure: Full Explanation

Other Key Objectives Served by Manipulation of Currency

There are various objectives that currency manipulation plays.

Here are some of the most common and major ones:

Response to foreign depreciation

Sometimes, the government of a country may be interested in currency manipulation as a response to foreign currency depreciation or other changes in foreign currency. The central bank may find that the home currency has become out of sync with the economic growth rate of the country and may have adverse effects. 

Improve trade deficit

Another reason why the countries use currency devaluation is to improve their positions of trade deficit. As a result of currency devaluation, the imports of a country decrease, and the exports increase. This brings changes in the balance of payments and also improves them.

However, the continuous use of currency manipulation can lead to negative consequences for the country. The devaluation of the currency also leads to an increase in foreign-denominated loans which can create an adverse effect on the economy of the country. For example, most of the euro-denominated debts are increasing as these countries are resorting to currency devaluations.

Reduction in the sovereign debt burden

Another reason for which the countries may use currency manipulation is to reduce the sovereign debt burden. If a country has a large number of government-issued debts, weakening the currency helps in making these debts less expensive.

However, this should also be used with caution, as the global debt is more than the sovereign debts which can undermine the economic position of the country.

Sustaining economic policies

The aspect of currency manipulations is also used by the countries for sustaining various economic policies. Sometimes the government wants to give a boost to the indigenous industries of the country by increasing the value of the imports. Thus developing countries may use such policies for the growth of the strategic industries of the economy. However, such policies should be used with caution, as they lead to other challenges of devaluation.

Countries can utilize currency devaluations to achieve economic policy goals. A weaker currency concerning the rest of the world can assist promote exports, reducing trade deficits, and lowering interest payments on the country’s outstanding government obligations.

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Read more: How Economics can open career options for you

Intervention Policies of Government for Currency Manipulation

There are several policies and procedures through which currency manipulations are undertaken by the government of any country. The central bank of a country can increase the supply of money, one of the after-effects created is the increase in the rate of inflation. There are several challenges that are faced by the policymakers to determine the amount and the timing of interventions.

Some of the important methods of intervention include the following:

Sterilized Interventions

Under such a policy, the exchange rate of a country is influenced without any change in the monetary base of the economy. Thus, it is a process that is completed with the help of two major transactions. The central bank of the country purchases the bonds of the foreign currency with the help of the domestic currency that is issued. With the help of these two transactions, there is a swap of domestic bonds with foreign bonds.

Thus, there is no consequent change in the money supply of the economy. When any country aims to decrease the exchange rate, it purchases the bonds of foreign currency. At the same time, the central bank sells the bond of the domestic currency, which keeps the money supply the same.

Non-Sterilized Interventions

In such a policy of interventions or currency manipulations, there is a change in the money supply in an economy. In this mechanism, the exchange rate is altered by purchasing the bonds of foreign currency through the currency of the domestic country.

Therefore, when any country aims to decrease the rate of exchange for the economy, it purchases the bonds of foreign currency. There is a consequent extra supply of domestic currency. This change in the demand and supply factors reduces the rate of exchange.

Indirect Interventions

This mechanism of the intervention of currency manipulation brings changes in the exchange rate indirectly. Some of the common measures include exchange control or capital control.

Such policies are often avoided by the countries as they lead to a reduction in market confidence or the development of inefficiencies in the operations of the economy. These are generally used as emergency control measures as they are damaging to the economy.

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Consequences of Currency Manipulation

Currency manipulation can have detrimental effects on a nation’s economy on a global scale.

These could consist of:

• Regulatory Action: In the event of currency manipulation, regulatory agencies may launch investigations, apply penalties, and file lawsuits against those involved.
• Economic Instability: Currency manipulation can result in economic instability, which impacts investors, consumers, and enterprises.
• Market Volatility: Increased market volatility can result from currency manipulation, making it more challenging for investors to make wise judgments.
• Trade Imbalances: Manipulating a currency can cause trade balances between nations to be distorted, which can cause tensions and conflicts.

It is mandatory to have an idea to understand how currency manipulation takes place and to do that one needs to have a very clear idea of this entire concept.

Also read: What is corporate strategy?

Examples of Currency Manipulations

There have been several cases in the world economy that show the incidence of currency manipulations. One such was conducted by the Swiss National Bank, between the years 2011 to 2015. These central banks have set the minimum exchange rate for Euro and Swiss Francs. Thus, the currency of Switzerland could not strengthen beyond a certain limit. Such policy was continued for three and a half years after which the minimum exchange rate was released. There were some sectors of the economy which were benefitted while other sectors faced negative consequences.

Let’s take a look at these examples to better understand currency manipulation:

Example 1 – Currency Manipulation Done by China

China serves as another important example that resorted to currency manipulation to boost the economy. The country has been known to intervene often and prevent the currency of the country from appreciating relative to other currencies. As a consequence of this act, the country has been able to experience a trade surplus for several years. Some experts and critics even argue that the country has resorted to impermissible “currency manipulations” and therefore some strict actions should be taken by the international regulatory bodies. Some studies have concluded that China’s currency policies were similar to an export subsidy.

Example 2 – Reserve Bank of San Fransisco

Another case of currency manipulation can be seen by the Reserve Bank of San Francisco. As a response to China’s undervaluing of its currency, various countries of the world have resorted to currency manipulations or interventions.

The exchange rate regime followed by China has raised several controversies in the developed economies which also had to intervene in their exchange rate to deal with the situation. This undervaluation of the Chinese currency was detrimental to US workers and businesses. It started a phase where capital accumulation got diverted from the United States to China. 

Example 3 – Japanese Yen

Another example of currency manipulation can be seen in the case of the Japanese Yen. There was a period from 1990 to 2000 when the country of Japan was experiencing a deflationary situation. Some of economists indicate that it was a deflationary spiral that was difficult for the country to come out of without any policy support.

The rate of production in the country came to a stagnant situation, and the rate of unemployment continuously increased. The situation became so aggravated that some of the important banks of the country also failed. This was the time when the policymakers felt that it is important to intervene in the currency exchange rate. This estimated that it will stimulate the economy and bring the country out of deflation. Thus, with the help of the Ministry of Finance, the central bank of the country conducted currency manipulations which helped the country come out of the deflationary situation.

Example 4: Currency Manipulation using the Russian Ruble

Another case of currency manipulation of currency interventions can be seen through the Ruble. The central bank of the country resorted to currency devaluation to improve its macroeconomic factors. These activities resulted in a surge in the economic growth of the country.

The aspect of currency manipulation has become a common trend among the countries boosting international trade. These are seen to be more common among the emerging economies of the world. This has become an important topic for discussion in international trade.

Conclusion

Currency manipulation disproportionately affects the optional part of the economy, and American assembling segment lobbyists routinely allude to China as a currency controller. Carlos D. A 2013 examination by Ramirez found that “a one percent expansion in the portion of Congressional area work power in assembling is attached to the likelihood that locale officials will mark China a currency controller”.

To conclude, currency manipulation is a complicated problem with wide-ranging implications. Although financial markets have measures to identify and stop these kinds of activities, manipulation is still possible. To protect the integrity and stability of the world’s financial institutions; regulators, legislators, and market players must be aware of the many currency manipulation techniques.

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Frequently Asked Questions

Q: What Happens When a Country Manipulates Its Currency? A: In a free market, American-made goods can compete anywhere in the globe. Markets are disrupted in three ways when countries manipulate currencies and unfairly lower the cost of their exports, harming the US economy and costing jobs.

Q: Which countries indulge in currency manipulation? A: Singapore, Switzerland, Taiwan, and Thailand have all been active manipulators in recent years. In 2020, Singapore and Switzerland were responsible for more than half of all currency manipulation.