Currency war and its implications on Forex market

There is uproar in the international currency market about the advent of 'currency war'. Currency war is a situation when many countries interfere in the foreign exchange market to devalue their currency. A cheaper currency helps makes the exports more competitive. Exports form a significant of economy of countries like China, Japan etc. A strong Yen (Japanese currency) for example will make Japanese exporters less competitive and can led to recession in Japanese economy. In an effort to prevent slowdown in their economy countries take deliberate measures to devalue their currency. Japanese Yen has been touching new historical highs in the year 2010 with Yen breaching 15-year high record in September. This is likely to impact the Japanese exporters which form a significant part of Japanese economy. Recently, Bank of Japan (BOJ) intervened twice in the currency markets which by many analysts has been seen as signs of open currency war in the coming years. The atmosphere has become quiet tense in past few months and volatility is expected to be high in the currency market, which is seen by many as a sign of dramatic change in the dominance of Greenback (US Dollar).

Some of the recent developments that have rocked the Forex market are:

• - Greenback lost foothold against all currency & currently any positive news related with US economy is not helping it to reverse the already battered currency.
• - US economy seems to be caught up in a Liquidation trap.
• - Unemployment rate (~10%) is currently one of the major issues of the developed economy.
• - US/Europe's focus is to halt economy slowdown was to boost domestic demand, achieved by maintaining low interest rate regime.
• - However, persistently depreciation of Greenback against major currencies might result in inflation in US
• - Near zero interest rates and falling economy condition of US has led to the flow of money to the emerging markets as the condition in most of the developed economies is fragile.
• - Hence, developing countries are facing currency appreciation against Dollar which is the dangerous sign for their foreign trade. Also, there is danger of short term inflation in the emerging economy and may jeopardize their economy.
• - China has stringent/controlled economy policy: fixed interest rate, undervalued Yuan against USD, unfair advantage in foreign market as China can export goods at much cheaper rate, Accumulation of USD and hold approx. 30% of the total foreign reserve of the world.
• - IMF meeting was unsuccessful as nothing concrete came out of the meeting.
• - Bank of Japan unilaterally intervenes in the international finance market (Forex) firstly by selling Yen and buying USD to keep it export competitive in the international market followed by decreasing interest rate to 0%. Yen broke record of all time high 82 USD/JPY in last 15 years and the Japanese currency is appreciating further.
• - Japan is facing the danger of economy collapse as its economy relies on export and any appreciation of Yen against USD will doubly hurt Japan.
• - Japan intervention in International financial market has led to other countries like Brazil, Israel to control the inflow of money. Since they don’t want to lose pace with China.
• - We have seen emerging equity market like India moving higher as their market witnessed the Foreign cash inflows. However, there is a risk that the Central Bank of these countries may take steps to halt cash inflow; there is a high volatility in the Asian market.
• - In Europe Irish bank crisis and bailout has hit hard the situation of Europe economy.
• - OPEC countries are worried about the falling purchasing power of Greenback. They are urging to revalue crude oil price around 100$ per barrel.

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