Currency Manipulation Is Very Common

There is a lot of talk about currency manipulation – whether a country is or is not affecting the value of its currency. This label has been used against China in the past, and recently China was stated not to be a currency manipulator. (1)(2)(3)(4) Currency manipulation is guiding a currency to a certain exchange rate to make the value of the goods and services more competitive versus another country’s goods and services. It is assumed that the more things that you can sell or trade, the better your economy is. A currency can also be manipulated to allow a nation to buy more goods and services for less. (5)(6) A currency in itself is simply a measuring stick for the value of an exchange. It does not have a value that it should be trading at or represent some way of making value, but this is how currencies are being treated on a macro level.

Currency manipulation is achieved by a government buying or selling its currency (creating demand or supply), buying debt that is measured in the currency (like government bonds, treasury debt or deposits), by influencing other players in the trading of the currency (interest rate talk, policy on fixing exchange rates), or by encouraging the economic players to change the value of the currency through their normal operation (lowering taxes, changing labour costs or regulation that would make goods and services cheaper). If the things exchanged based in currency units are cheaper, than the value of the currency itself is also affected.

Why is there so much attention given to currency manipulation? Many governments do it in one way or another. (4) Trying to debase a currency is becoming so common that the phrase “currency war” has been used to describe a situation where it can go too far. (7)(8)(9) If you include ideas like the Fed QE, the Eurozone bond stimulus and Japan’s Abenomics, these all have side effects on the currency valuation. The value of a currency on a macro level is based partly on interest rates, the demand for the currency and the trade of goods and services. These “stimulation” programs are changing all of these factors, so they are essentially currency manipulation in part. If changing the value of your currency is this common, it does not make sense that certain countries are being singled out for manipulation.



About joetheinvestor
Joe Barbieri has Bachelors degrees in both Civil Engineering and Commerce from the University of Toronto. He has worked in the Financial Services field for over 12 years, covering positions from Retail Customer Service and Fund Accounting, through to Investment Research on the Institutional side. He has worked in 5 companies, spanning banks, a mutual fund, a Consulting Firm and a Large Canadian Pension Plan. He currently has a Chartered Financial Analyst designation (CFA) from the CFA Institute. He has recently published articles in Pension and Benefits Monitor Magazine as well as the Internet.

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