A Coming Currency War?

The Chinese government yesterday announced it would move to devalue its currency, the yuan.  The move is seen both as a necessary step in moving towards decentralizing China’s heavily-regulated economy and as a short-term effort to boost the nation’s economy. By devaluing its currency, China will make exports less expensive in foreign currency terms, while simultaneously making its imports more expensive in local terms. The move had immediate international repercussions, with the Dow Jones Industrial Average falling more than 200 points on the news. In the longer term, the move may also force the US Federal Reserve to push back its plan to increase interest rates in the United States.

Countries regularly attempt to manage currency values, usually within a relatively narrow band of values. By increasing the supply of currency in the market, or by reducing interest rates, governments can put negative pressure on the value of their national currencies. In doing so, they make exports from the country less expensive in global terms, thereby providing an economic stimulus. However, some observers fear that the move by China may spark similar moves by other countries, leading to a competitive devaluation and a currency war, thereby threatening global economic growth.

What do you think? What impact will the move have on China? What impact will it have on the global economy? Should China continue with its devaluation? Why?

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