The US dollar is stronger than it has been in years. On the other side of the coin, the Japanese yen is weaker than it has been in years. These two opposites show a rising concern: A war in currency. As currencies begin to lose or gain value, others might fight a war of devaluation. This is a new part of currency wars, which is a fight of global markets trying to manipulate the global exchange in their own favor. This could result in countries losing value in their currency, even when they are currently doing well. It is a troublesome environment for all markets.
Strategists feel that there is a strong chance of this war going on as the Japanese yen weakens. It is one of the major points of this currency war, and it will affect major currencies across the globe. This will lead to more countries getting involved in devaluation. The further down it goes, the more other countries will participate.
A global reaction
The Chinese renminbi is also taking part in this. It is competitive devaluation as various countries try to rise above the others. Due to this devaluation, it is no surprise that fears of deflation have arisen. Countries fear that their own currencies will face a hit because of this currency war, causing their value to drop quickly.
The euro, too, has weakened along with Asian currencies. After purchases, the currency has lost some strength. Countries have begun closely watching their banks and own currencies to ensure that they do not lose value or strength. They want to make sure that they do not feel the full effect of deflation. Due to how close they are to deflation, this is a reasonable fear. If the yen continues to weaken and if China joins in on the currency wars, it is possible that the euro could start to deflate completely as countries begin their battles.
Weakening of the US dollar
As noted, the US dollar is at its strongest in years currently. Compared to other currencies, it is doing well. That does not mean that deflation is no longer a fear, though. While it is doing well, the effects of the currency wars could begin to hurt the USD. Getting pulled into this war of currencies could result in the US dollar losing value over the course of this year. Again, if the yen weakens and China joins in, it could lead to serious damages to currencies across the globe. Even if the US dollar does well in the now, there is no saying what will happen if another currency war begins.
Fighting back and theeEffects of power
Countries are attempting to fight against changes in value. One way that they do this is through the manipulation of reserves. Of course, it is not always the case that this happens, but it is one option when trying to keep control in this situation.
One issue here is that it might lead to countries having a stronger currency over others, which could lead to decisions that both weaken their currency and strengthen other currencies. Decisions like this include purchasing cheaper imported goods over local products.
Strategists and economists agree that countries need to build a strategy and rethink their approach to this deflation. Concerns and worries already exist due to the weakening Japanese yen, and current methods to fight against deflation might not work.
With some people stating that the US dollar has already become part of this war, the next move has to be a good one. Making that move, though, requires patience and an eye on the market. People have to look at the state of the Japanese yen and see what happens next.
Still have questions? Feel free to check out our ultimate guide on how to trade forex to learn the different ways to utilize trading strategies, avoid amateur mistakes, and maximize your income.