Definition of currency wars

The term currency wars, coined in September 2010 by Guido Mantega, Brazil’s finance minister, refers to monetary and exchange rate policies designed to lower the value of one’s currency.

In late 2010 many countries had policies in place that would, all else equal, put downward pressure on their own currencies. Such policies, which could improve economic growth in one’s country at the expense of growth in other countries, these policies used to be called beggar-thy-neighbour monetary policies. Mantega labelled these currency wars.

Example
In late 2010, the central banks of Japan, South Korea and Taiwan (among other countries) intervened in currency markets in an effort to make their currencies cheaper, China was keeping the value of the renminbi from increasing, and monetary policies in the US and the eurozone were very expansionary. Taken together, these policies would tend to put upward pressure on other countries’ currencies.

These actions were both direct, in the case of currency intervention in which one’s own currency was sold in order to purchase (and, hence, put upward pressure on the value of) a foreign currency, and indirect, in the case of expansionary monetary policy that lowered one’s own interest rates and prompted investors to shift portfolios toward currencies with higher interest rates. [1]

View
Interactive graphic: Currency wars explained