Currencies Devaluation May Trigger a Trade War

One of the outcomes of the global downturn has lead to significant changes in the exchange rates of some currencies. For example, while the British Pound, the Australian Dollar and the South Korean won have weaken dramatically; the Japanese yen and the Swiss franc have reached multi-year highs. And if some countries fight to stop further currency depreciation, others like Switzerland pursue its own devaluation.

The Swiss National Bank decision to push the franc value down aimed at two things: eliminate the risk of deflation and boost the economy by improving the country’s competitiveness. Indeed, exports which constitute over 50% of GDP dropped the most in at least 11 years in December and the Swiss leading economic indicator index, which aims to predict the economy’s direction about six months ahead, is at a record low. Adding to that, a slowing domestic demand, Europe’s eight largest economy may be in a big trouble.

But who will be next to use currency devaluation? Without doubt, Japan is a good candidate. In fact, exports which have been the main driver of the Japanese economy over the past few decades are deteriorating day by day due to a weakening global demand and a strong yen. The problem here is that Japan is the world’s the third largest economy and any change on their exchange rate policy can easily trigger a trade war with the United States or China. This is the so called domino-effect and its consequences can be disastrous for the world economy.

Anna Fedec,
3/17/2009 4:13:23 PM