Research Korner: Foreign Exchange

A Currency War Analysis of USA Dollar, Euro, Japanese Yen and Chinese Yuan/Renminbi

A Currency War Analysis of USA Dollar, Euro, Japanese Yen and Chinese Yuan/Renminbi In any countries across the globe, the fiscal and monetary policies seek at achieving relative macroeconomic stability. The monetary policy framework in various countries around the globe is more than the objective of monetary policy is price and exchange rate stability. The monetary strategy in the inflation management is based on the view that inflation is essentially a monetary phenomenon. The economies target the money supply and its growth can be the main objective of the price stability. In order to promote the appropriate methods in monetary policy, the supply growth is firstly considered in targeting the inflation. With this, the USA Dollar, Euro, Japanese Yen and Chinese Yuan/Renminbi are battling each other to increase their stability in the global market. In accordance to the currency wars, performances of widely used currencies are assessed based on their exchange rate value.  According to Irwin (2002), the function of the exchange rate is to equate supply and demand. Exchange rate is much more than an ordinary price it is between the price structure of one country and those of all others, and thus between the national economy and the world economy. An inappropriate exchange rate affects the relation of domestic to foreign prices of a wide range of goods and services and to some extent the relation of one group of domestic prices to others. A substantially inappropriate exchange rate for a prolonged period would seriously disturb the economy. For Salvatore (1993), exchange rates as the country's international transactions are an integral part of its economy because it has a significant effect as they affect as they affect output and employment, prices and real income, and money and capital markets. From there, the primary function of USA Dollar, Euro, Japanese Yen and Chinese Yuan/Renminbi is to help bring about such a pattern of international trade and capital flows. That function, it should be emphasized, is the same whether a country has a fixed par value or a freely fluctuating exchange rate for its currency. While Dreyer (2004) states that exchange rate is considered one of the most significant international economic developments. According to him, decades ago there had been breakdown of the system of adjustably pegged exchange rates on which the post-war international monetary system had been based and the widespread adoption of more flexible exchange rates. And by the fall by of 1975 there is an experience accumulated sufficient with the new system of flexible exchange rates to attempt a major effort at evaluation of the initial performance of floating rates. The US dollar has four main objectives: ·         Remain one of the top currencies in the world. Being one of the top currencies enables the dollar and the US to command the respect and confidence of other nations. Thus, the US is able to expand its operations through the continued strengthening of the US dollar. ·         For the US to gain more profit than other powerhouse nations. The US dollar currency that is being used in the trading process used all over the world is able to meet high quality standards. As a result, the US is able to earn more profit as against other industrialized nations (El-Agraa, 2004). ·         Build the best currency portfolio, with the US dollar as the international currency of flagship; and ·         Maintaining its independence. Being an independent currency allows the US dollar to continue its tradition of excellence in both its ability to purchase products and services by setting new trends and standards. In order to achieve these objectives, the US implements a strategy of selling a combination of local brands and international brands, but maintaining the US dollar as the flagship currency. The US also aims for broader positions as well as either the top or secondary positions in any market. Any of these positions would be enough for the US to deliver a high level in terms of production, marketing and distribution using the US dollar (Yarbrough & Yarbrough, 2006). Moreover, these positions create a platform from which the US can sell or trade their premium and other specialty products. With a continued focus on the structures of the costs, the above mentioned objectives should undoubtedly be reached. It is said that the currency wars between USA Dollar, Euro, Japanese Yen and Chinese Yuan/Renminbi has been considered as a major contributing factor that enhances the global market. To be able to prevent an economic chaos during currency wars, different policymakers from the monetary and fiscal sectors have been able to do their very best to solve the issue. Accordingly, the initial responses for the currency wars to avoid any financial crisis should be made by the central banks which increased the availability and accessibility of the short-term financial funding with their domestic financial system and eased monetary policy with the intention and aims for limiting the fallout from the financial system in line with the real economy. Aside from this, fiscal policies have also been employed to shore up the financial fields through the measurement which aims on bolstering the balance sheets of the weaker sectors.   References: Dreyer, G. (2004). A Single Currency for Asia?, Asian Development Bank, viewed 04 February 2011, <http://www.adb.org/Documents/Periodicals/ADB_Review/2004/vol36-4/a-single-currency.asp>. El-Agraa, A. (2004). European Union, Harlow: Prentice Hall Irwin, D. A. (2002). Free trade under fire, Woodstock : Princeton University Press. Salvatore, D. (1993). Protectionism and World Welfare, Cambridge: Cambridge University Press. Yarbrough, B.V. & Yarbrough, R.M. (2006). The World Economy. Trade and Finance. London: Thomson South−Western.

A Currency War Analysis of USA Dollar, Euro, Japanese Yen and Chinese Yuan/Renminbi

A Currency War Analysis of USA Dollar, Euro, Japanese Yen and Chinese Yuan/Renminbi In any countries across the globe, the fiscal and ...