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Currency wars

Ken Brown, MBA Programme Director

Faculty Blog


Venezuela announced a surprise devaluation of the bolivar on Friday (8th Feb).  This coincided with a holiday weekend in Venezuela, so workers and companies will have to deal with that shock on Tuesday.  The devaluation was from 4.3 bolivars/$1 to 6.3 bolivars to $1, a devaluation of 32%.  This is Venezuela’s fifth devaluation since 2003.

Does this matter?

Who loses out in a devaluation?  In Venezuela, foreign companies will suffer a loss of 32% on their bolivar holdings, inflation will get a fresh boost and workers will lose out because wages are fixed.  Venezuela itself will not see a move to export led growth as 94% of the country’s exports by revenue are oil.

Who else is devaluing their currencies and what is the impact?

Japan has allowed the yen to drop by 22% against the dollar and by 30% against the euro (October to February).  Sony, Japan’s largest exporter has lost money in each of the last four years (a record 557Ybn in 2011) because of the strong yen. It is estimated that Japanese corporate profits are boosted by 1% for every 1% drop in the currency’s value.  This goes a long way to explaining the 30%+ rise in the Japanese stock market since mid November.

The OECD economies are still struggling with austerity measures that have been imposed to tackle the debt overhang from the Credit Crunch in 2008.  Economic growth is key to escaping the stagnation of the last few years.  What better way of achieving that than by a competitive devaluation of the currency, giving a boost to the export sector.

The problem is that not every country can do this, one country devalues against other countries to gain an advantage.  From early 2010 until autumn 2012, Europe had a weak currency, but it didn’t  help the economy (it would have been a lot worse if the euro had been stronger).  Now the euro is strengthening and the European countries don’t like it.  Japan and America (and UK) seem to be winning the devaluation game (and what about China?).

Competitive devaluations are not a new tactic.  They were used in the 1930s to gain an advantage, which worked for a while, until other countries devalued as well.  These beggar thy neighbour policies made the economic situation worse overall, although some countries gained an advantage over others.  The chart below shows the impact on economic growth when countries came off the gold standard (a fixed exchange rate system) and devalued their currencies.  The countries that did it early gained an economic advantage over the others.  Is history repeating itself?  The Eurozone does not want to end up with the strongest currency, but it is moving in the wrong direction for a lot of the member countries.

Should the Eurozone try and weaken their currency?

Do you think that it is the floating currency regime that causes the instability?  Since the world switched from fixed exchange rates in 1971, there have been continued economic crises.  Would it be any different under fixed exchange rate regimes?