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Currency Wars

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For a long time, there have not been any currency wars, not since the world witnessed the one between the British sterling pound and the United States dollar after the World War II (Davids, 1973).  Since then, the dollar has been utilized as a global trading legal tender in many states across the world. It is the dynamic that has allowed the American currency to dictate the international financial system in spite of such financial catastrophe as the 2008 niche period. However, as the dating shows, the United States’ economy continues to generate weak growth as of 2009, resulting in the country mounting up a gigantic monarch debt (Davids, 1973). However, despite the negative indicators, the dollar continues to act as an international currency. To some it might seem normal but to others it looks like a bad dream from which one would wish to wake up.

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On the contrary, the Chinese currency, the renminbi (RMB), is experiencing a blossoming status even though it has been on the international market for barely three years. The Republic of China is currently perceived as the world’s leading business state as it is manifested with the numerous dealings in the whole Asian region that is trading in the Chinese legal tender (Rickards, 2012). That has in turn resulted in China’s government piling pressure on the international trade players to reform the international monetary systems so that he RMB is internationalized (Rickards, 2012). Such developments are in turn bringing about heightened speculation on the possibility of the Chinese currency supplanting the US dollar and in the process jeopardizing the economic benefits that the United States has been enjoying as being the world’s dominant currency in trade matters.  The possible worst scenario would be the United States experiencing a decline in its prestige and global leadership (Rickards, 2012). The issue at hand from an economic perspective seems to be a nightmare for the American citizens as they have enjoyed the staus for a very long period.

With the developments in the world trading currency issues, it is much clear that the currency is nowhere near ending especially if the United States and the People’s Republic of China continue with their smart financial quantitative easing programs. That in turn raises the pertinent question of what is likely to happen should the United States maintain its hardline stance and initiate a currency war with other nations, especially China or Japan (Davids, 1973). That is because Washington will end up taking confrontational approaches against competitors like China regarding the trading currency in the effort to bring currency devaluation to a close (Davids, 1973). In that situation, imagine the United States using protectionist measures such as the use of targeted capital controls against a country like China that is posing as an enormous challenge to the growth of the US economy and its global leadership status (Davids, 1973). Significantly, to some it seems like a horrible dream, but in reality, it is what is taking place in the international market.

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The US, known for its military minded approaches to issues at hand, is likely to use its currency as a weapon thereby preventing China from buying the foreign assets so that the latter can feel the pinch and proceed to devalue the RMB (Rickards, 2012). That will also mean that the US is more likely to devalue their currency as a means to counter the threat of deflation for a share of the competitive advantage. Should that be the case, one wonders how things will unfold (Rickards, 2012). What would be the impact of such move on the US financial markets and its position as a dominant reserve currency? The answer would not be based on a bright perspective, especially for the Chinese people.

This fact has the potential of making the United States lose on the deep, liquid, open and dependable financial markets.  Such move would, in fact, worsen the situation because fighting Chhina’s economic resurgence would be fruitless. Nowadays China is the largest exporter in the world and is the second largest importer, meaning that both the United States and Japan are far behind China economically.  On its economic development agenda, China has embarked on internationalization through the concept of soft power approach (Davids, 1973). China is suing the plan to gain commercial mileage in many parts of the world, and as such, it would be disastrous for Washington to intercept China economic growth through intimidation and coercion.

Washington should never start any currency wars, as that will give competing countries the ground to prove that the US has never meant well for the international trade community with its dollar (Davids, 1973). That is likely to make various nations seek alternative trading currency as in the case of Asian countries that have linked their currencies with the Chinese RMB in managing their exchange rates. They will in turn make China the top trading partner thus reducing the dollar’s dominance (Davids, 1973). Again, the impact of this is that the internationalization of the RMB will be successful as a regional trading currency in Asia as well as other areas like the BRIC and Africa in which China is increasingly penetrating trade wise.  The process is likely to persuade many states to utilize the Chinese money in implementing business, and as such, the dollar manipulation in these regions will decrease during such events (Davids, 1973). 

With the approach of Washington starting the first stride of currency war, which is expected to result in the service sector going for the Chinese currency in the international commerce, a shift from the dollar is likely to occur (Davids, 1973). This is justified by China being the biggest importer in the world, with commodities as more than 30% of the total import. China imports coal, iron ore, crude oil and soybeans, which have a substantial share on the international import market.

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