Could a situation of competitive devaluation lead to wider economic or political problems?
The danger that a currency war breaks out is significant. There is a combination of factors—from unemployment in the United States to the undervalued Chinese exchange rate to fears in emerging markets that an inflow of capital will prove destabilizing and hurt their competitiveness—making it difficult for governments to effectively handle the situation. On one side, the United States is unable to agree on fiscal stimulus, but it has a high unemployment rate that it can’t tolerate politically. With this in mind, it is using quantitative easing, export promotion strategies, and insisting that several other countries should allow their currencies to appreciate. In the eyes of many, this spells a weak dollar policy even though U.S. authorities strongly deny that they are looking for a lower currency. But it’s understandable that foreign policy makers are looking at the consequences of what the United States does rather than what U.S. leaders say. On another side, several countries—particul
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