In 2010, countries around the world engaged in a race to the bottom to devalue their currencies in hopes to boost exports and thus foster economic growth. Now in 2012, fears of another currency war have arisen again after the Federal Reserve announced the third round of quantitative easing which has caused many to believe that the U.S. dollar will weaken. It’s still unknown if central banks in other countries will respond by keeping the value of their currency low relative to the dollar. The main goal of weakening a currency’s value is to increase exports by making goods cheaper in relation to other countries. So what exactly does this mean for international business?
On the surface weaker currencies abroad may seem like a good thing for global businesses as importers would basically get “more for their money” when bringing in products from overseas. However, taking a second look, it also has very severe consequences wrapped around the idea of uncertainty. In the event that a country “corrects” the value of its currency, importers who depend on inputs from abroad will find an unexpected increase to their import costs. This is very difficult to plan for as countries fluctuate their foreign exchange value sporadically and sometimes without warning as a result of currency wars. This instability in import prices can have drastic impacts on international companies.
From an individual business perspective, international currency wars impact the planning and budgeting process of business due to the increased uncertainty. Perhaps more important to international business is the fact that currency wars also affect economies around the world. For example, when the U.S. Federal Reserve announced a stimulus package to strengthen the American economy, this caused the value of the U.S. dollar to fall relative to other currencies. Some Latin American countries like Mexico welcomed the stimulus as its economy is tied closely to the United States, so any boost to the U.S. economy also benefits Mexico. However, other countries like Brazil fear the fall of foreign currencies. As a result of lower currencies abroad, Brazil’s domestic currency, the real, will strengthen. This makes Brazilian exports expensive compared to other foreign countries with weaker currencies.
As you can see, trade competition can be a critical by-product of these currency wars making it harder for companies to export goods in certain markets. In the interconnected business world of today it is important to notice that currency variations have intricate effects on economies worldwide, not just domestic markets. When policies involving currencies go into effect around the world, policymakers and business leaders must come to realize the many ripple effects created by currency wars.