Why countries are cheapening their currency

Monday, December 27, 2010

Why countries are cheapening their currency

The economic disaster which countries are facing in the present scenario has led to the eruption of currency war. Every country in some way is trying to cheapen their currency. It’s probably the best way to come out of an economic slump.

However, the question remains when does this stop? Each country pegs its currency against the dollar, and when a particular country try and cheapen its currency, it would only help when dollar remains higher.

But, the situation is such that even US currency is depreciating. The Federal Reserve’s are printing a series of currency notes in order to cheapen the currency, which has created a currency war. The emerging economies are struggling to keep up the pace with the deprecating US economy.

The problem had intensified more as compared to earlier. The earlier form of currency valuation was only dependent on gold reserves, but now countries have adopted more than one way to determine their currency.

It’s not just gold these days. Now countries like United States of America prefer to use a floating exchange rate system. Many countries also try and use flexible exchange system. India is one of those who use a flexible exchange rate system to check their currency.

Though, the countries may use any of the three currency check systems, yet, they all follow the same objective, of keeping more US debts to value their currency. The point has reach to a level, where it has become imperative that to improve finance and economy levels of countries, US economy need to recover. Only then, cheapening of currency would help, otherwise, all efforts of emerging countries would go down the drain.

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