Currency Manipulation Review

US and China Fiasco


Currency manipulation considered as the forbidden practice of artificially setting exchange rates by the central banks of trading partner nations to gain unfair advantages while distorting the currency markets. Trading partner manipulates the currency markets by keeping the target currency (say US Dollar) artificially high, and their own currencies artificially low. Currency manipulation is an illegal practice under U.S. law and various International agreements.

Typically currency manipulation occurred when a country fixed the exchange rate of its currency relative to the currency of another country. This can be due to requirement for a fixed exchange rate or else the mandatory use of a country’s central bank for foreign exchange sales.

Manipulator country deliberately keeps its currency at lower level when fixes the exchange rate of its currency relative to the currency of another country to get an unfair competitive advantage and protect their export prices, another point here is the fact that manipulator usually possess the large share of the exports to make any significant influence.

The practice resulted into rapid increase in trade deficit for targeted country because they have to pay more for imports and get less from exports also their manufacturers left severely hit with lower margins due high input costs and price competition from cheap imports. The recent example is of growing speculations that the Chinese Yuan value has been kept low deliberately to protect the competitiveness of Chinese export prices, a sensitive issue between China and the United States. Though the DEC.’08 semi-annual report to the US Congress, the US Treasury did not identify Beijing as a currency manipulator but also pointed that the yuan was relatively undervalued against the US dollar!!! Yup! Confused isn’t it?

Getting more US specific, during pre election campaigns both, President Elect Obama and his political rival McCain expressed concerns over China's currency traded artificially low, but Obama seemed more unpleasant about it. As said, "I will use all the diplomatic avenues available to seek a change in China's currency practices". Indicated his views that China pegs their currency at artificially low rates, for making its exports unfairly cheap. He also backed the legislation defining currency manipulation as an illegal subsidy attracts US trade restrictions.

No doubt that the loopholes of legal system can be exploited. But the present manipulation concerns have got more voices during ongoing financial crisis situation and some consist of those looking for scapegoat to divert attention from their own failings.


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