The value of a currency is a reflection of market confidence in a country: the strength of its economic fundamentals, its potential for growth and its social and political stability, among others.
Unfortunately, rather than let free markets determine the value of their currencies, national and monetary authorities frequently try to manage them in an effort to boost their economies – often with unforeseen consequences.
Weak currencies make goods and services cheaper on global markets, boosting national exports and economic growth. However, this can lead to a race to the bottom as the authorities try to keep their currencies cheaper than the competition. This disrupts fair trade, breeds protectionism and encourages speculation and market volatility.
Japan and the United States are devaluing their currencies by stealth, by making cheap money available as a means of economic stimulus; France would like the euro to be weaker, despite German opposition; while the Swiss have set a cap on their Franc. And while China has slowly been allowing the market to influence the strength of the yuan, that it has kept artificially low, other emerging economies are frustrated that US monetary policy has made their currencies less competitive.
The Group of Seven advanced economies have stated that they are not devaluing their currencies, but are simply trying to boost their economies. But in the global economy, domestic policies have international consequences. They must be wary of the unforeseen consequences of their monetary policies.
