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I was not sure where to post this question. If I have placed in wrong thread I am sorry.
I was wondering if anyone could explain the possible "currency war" that is becoming more of a news item.

How does a government devalue its currency - specifically what methods does it employee?

What is the relationship to inflation and interest rates?

Some information and clarification on this topic would be great.

Thanks
twj332 aka slfe
 

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America has only one way out of this crisis and that is to print money (Quantitative easing) as the crooks call it. They print money and that devalues the value of other US Dollars held globally... By devaluing the currency they may be able to kick start exports and the economy but other countries will have to print money too to ensure the exchange rate says within reasonable range... If Canada for example doesnt print money our dollar will rise too high versus the US Dollar and kill exports...


Dont forget Canadian Dollars, US Dollars are paper backed by confidence; what we are seeing is the destruction of currencies worldwide.... Anyone check the price of gold recently?
 

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I was not sure where to post this question. If I have placed in wrong thread I am sorry.
I was wondering if anyone could explain the possible "currency war" that is becoming more of a news item.

How does a government devalue its currency - specifically what methods does it employee?

What is the relationship to inflation and interest rates?
This is a complex macro-economic issue and all aspects cannot be covered in a few lines of post.
But in general, currency can be devaluated explicitly or implicitly.
Explicit is when a country's central bank pegs its currency to another and will not free float it.
Examples are Chinese Yuan, Jamacian Dollar, Bahamian Dollar, the Indian Rupee prior to 1992, etc.
This is often done to encourage exports, discourage imports, encourage tourism, etc.

There are many implicit ways, such as issuing sovereign debt, quantitative easing, reducing interest rates, etc.
Currency valuation, inflation and interest rates are closely related to each other in a dynamic relationship.
Money supply (M1, M2 and M3) comes into the picture as well.
Ceteris paribus, increasing interest rates strengthens currency and vice versa.
Currency devaluation causes inflation, which will eventually lead to higher interest rates.
There are formulas, etc. for this - all of which assume a certain state.
In reality, however, there are many factors at play: social, political, economical and international.
Sometimes there are no clear cut outcomes and things take a while to become apparent, as we are all seeing these days.
 

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How does a government devalue its currency - specifically what methods does it employee?
If Government A wants to devalue its currency, they would do so by purchasing other currencies in mass quantities. i.e. Artificial demand.

A specific example to this is the current Chinese currency. The Chinese Government has been purchasing in mass quantities (billions) of US treasuries. This has had the effect of devaluing their dollar relative to the US dollar. The simple solution for the US, would be to buy Chinese treasuries to cancel this effect.

Why would the Chinese want to do this? The US is the largest consumer in the world. Devaluing the Chinese currency helps maintain export demand from China to the US.

For China, its all but a stated fact that this is occurring. Japan is also suspected of manipulating their currency as are many other Asian exporters like China.

A risk to China of this type of activity (aside from political) may be a rapid rise in their currency. A rapid rise may quickly shutdown export demand, and leave the economy stale. However, China is also attempting to shift from export an driven economy to a consumer driven economy (similar to the US). If they are succesful, this little trick could have positive consequences to their economy - as they would suddenly greatly increase their global buying power.

What is the relationship to inflation and interest rates?
Interest rates effectively represent buying power of the consumer. When interest rates are low, the consumer has more buying power, because they can borrow money more cheaply to buy goods. When interest rates are high, they can't afford to borrow as much money because they must pay more interest in order to cover the loan. Therefore, interest rates help to guide consumer behaviour, thereby influencing demand.

In principle, inflation should rise and fall with demand because as interest rates rise, demand falls.

Scenario A - Rising Interest Rates => Decreasing Demand => Controlled Inflation

Scenario B - Falling Interest Rates => Increasing Demand => Increasing Inflation
 

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HaroldCrump summed it up nicely, and I'll only add that sooner or later devaluing the currency will show up as price increases in just about everything (inflation) and then the interest rates will be forced up sharply.
 
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