via Wall Street Journal
When economies start to flag, governments will occasionally start what is known as a currency war. It is important that investors understand what the term means and why it can be so destructive to the countries involved.
Such conflicts start when one country decides to lower the value of its currency to increase its exports. Exports become cheaper for foreign buyers whose currency doesn’t deflate.
“It’s a beggar-thy-neighbor policy,” says Robert Wright, professor of political economy at Augustana University, in Sioux Falls, S.D. “In other words, ‘We aren’t doing so well, so we’ll take it out on our partners.’ ”
For example, if country A devalues its currency by 10% against country B, then the exports from country A likely will surge because they are now cheaper. The problem is, the gains come at the expense of country B, which will see its exports decline. Domestic sales by companies in country B also may be hurt, since imports from country A are now cheaper.