Currency War Explained 2025: How It Works, Impact, and Real-World Examples

Erika Rasure is a globally respected expert in consumer economics, renowned for her research and educational contributions. She specializes as a financial therapist and transformational coach, focusing on empowering women to master investment strategies.

What Is a Currency War?

A currency war occurs when two or more countries deliberately devalue their currencies to gain an economic edge. While currency values constantly fluctuate in foreign exchange markets, a currency war involves coordinated or reactive policies by nations to weaken their own currency values to boost exports.

Countries primarily pursue currency devaluation to make their goods cheaper and more attractive internationally, thereby stimulating their economies.

Key Insights

• Currency wars involve reciprocal currency devaluation aimed at enhancing each country’s export competitiveness, often at the expense of others.
• Devaluation intentionally reduces a currency’s purchasing power to make exports cheaper.
• Nations may use this tactic to improve trade balances and ease sovereign debt pressures.
• However, currency wars can trigger inflation and other unintended economic consequences.
• Consumers often face higher import prices during these conflicts.

Understanding the Mechanics of Currency Wars

In a currency war, countries lower their currency values to reduce export prices, making their products more appealing abroad—a strategy known as competitive devaluation. Simultaneously, imports become more expensive domestically, encouraging consumers to buy locally produced goods.

This dual effect can boost employment and accelerate economic growth. However, it may also hinder productivity if domestic businesses rely on costly imported equipment.

Economists warn that currency wars can harm the global economy by increasing protectionism and trade barriers.

Important Note

Monetary policies such as lowering interest rates and quantitative easing (QE) can indirectly cause currency devaluation.

How Do Currency Wars Begin?

In today’s floating exchange rate system, currency values are mostly market-driven, but central banks can influence depreciation through policies like cutting interest rates or purchasing assets via QE. These indirect methods can simulate currency devaluation effects.

Unlike past eras with fixed exchange rates, modern currency wars involve more complex interactions between market forces and policy decisions.

Currency War vs. Competitive Devaluation

The term "currency war" is rarely used casually among economists. Former Brazilian Finance Minister Guido Mantega’s 2010 statement about an ongoing currency war sparked significant debate. Nowadays, countries often downplay such actions as "competitive devaluation" to avoid diplomatic tensions.

Quick Fact

"Competitive devaluation" is a softer term often used interchangeably with currency war.

In 2019, central banks from the U.S., UK, and EU engaged in what was described as a "covert currency war," using devaluation as a key tool to stimulate sluggish economies amid ultra-low interest rates.

That same year, trade tensions between the U.S. and China escalated, with China responding to U.S. tariffs by devaluing its currency—raising fears of a full-blown currency war.

Why Do Countries Devalue Their Currency?

Although it may seem counterintuitive, a weaker currency can benefit a nation by making exports cheaper and imports more expensive. This shift encourages domestic consumption of local goods and can improve trade balances.

Such policies often lead to higher employment, GDP growth, and increased domestic investment fueled by stronger capital and housing markets.

Beggar-Thy-Neighbor Effect

When one country devalues, others often follow to maintain competitiveness, triggering a cycle known as "beggar-thy-neighbor" policies, which can harm all parties involved.

The U.S. Strong Dollar Approach

The U.S. has traditionally maintained a "strong dollar" policy, benefiting from its status as the world's largest economy and the dollar's role as the global reserve currency. This attracts significant foreign investment despite some drawbacks like reduced earnings for American expatriates.

Unlike many countries, the U.S. relies less on exports due to its vast consumer market.

The Dollar's Rise and COVID-19 Impact

Following the 2010 warnings of currency wars, the U.S. dollar surprisingly strengthened against most currencies until early 2020. The onset of the COVID-19 pandemic and subsequent monetary expansion caused the dollar to weaken.

Pre-Pandemic Monetary Policies

The dollar's pre-pandemic strength was partly due to the U.S. being first to implement and then unwind QE programs, while other major economies delayed similar actions.

Policy Divergence

While the U.S. tightened monetary policy, other countries maintained looser policies, causing the dollar to appreciate. Factors included subpar global growth, near-zero interest rates, and negative bond yields in other regions, making U.S. Treasuries highly attractive.

Negative Consequences of Currency Wars

Currency devaluation is not a cure-all. Brazil’s experience showed that aggressive devaluation can spur hyperinflation and economic collapse.

Risks include reduced productivity due to expensive imports, excessive inflation, capital flight, increased trade barriers, and heightened currency volatility, which raises costs for businesses and deters foreign investment.

Potential Harms of Currency Wars

Devaluations can lead to inflation, hurting consumers who face higher import prices. When multiple countries devalue simultaneously or impose protectionist measures, trade imbalances may worsen instead of improving.

Relationship Between Currency and Trade Wars

Trade wars often impact currency values rather than the other way around. For example, U.S. tariffs on Chinese goods led to a decline in demand for the Chinese renminbi, weakening its currency.

In 2024, the U.S. maintained a significant trade deficit with China, importing far more than it exported.

Objectives in a Currency War

Countries aim to reduce trade deficits by making exports cheaper and imports costlier, encouraging domestic consumption. However, retaliatory devaluations or tariffs by other nations can neutralize these benefits.

Conclusion

A currency war arises when countries competitively devalue their currencies to boost exports and domestic demand. While this can promote growth and employment, it also risks inflation, capital outflows, and global economic instability. Without accompanying structural reforms, the benefits of currency depreciation are often short-lived as other nations respond in kind.

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