Currency crisis and currency war are two different phenomena but bring same results, and that is sharp decline in the value of currency. It is also called devaluation of currency.
Meaning and definition of currency crisis or war
In currency crisis, currency gets devalued due to huge deficit of balance of payments. But, in case of currency war, nation volunteerily depreciates its currency value to capture more market power against competitors.
If there is sharp decline in the value of currency, to arrest decline, government and central bank have to step in to get rid of the hyperinflation or devaluation.
Understanding currency crisis
Currency is the system of money that country adopts as the medium of exchange for goods and services. So, it manifests the strengths as well as weaknesses of economy.
If there is shortage of production of goods and services in the country, country needs to import from international market. It is not possible to purchase anything from international market in domestic currency but international dollar.
In other words, country depends more on import always face trade imbalance due to overdependence of import. Current account deficit is the characteristic feature of import driven economy.
As a result, country relies more on the borrowing and foreign capital to finance deficit current account. In this way, constantly growing foreign debts and interest payments makes the economy weak and so the currency.
For example, some of the Asian, south America, and African countries currencies faced currency crisis in the recent time.
Soft currencies vulnerability
Most importantly, hard currencies are more resilient for the currency crisis than the soft currencies. Generally, developed nations have hard currencies, whereas, developing as well as underdeveloped have soft.
The Turkish lira, Iranian rial, Vietnamese dong, Indonesian rupiah, Venezuelan bolivar etc. are the examples of soft currencies. Especially, when the Turkey had political instability, its currency devalued around 20 percent in a year.
Managing currency crisis
There is no magic wand to ward off the currency crisis in any nation. As a quick response, government and central bank steps in to lessen the degree and intensity of currency crisis by selling off foreign exchange reserve and gold kept with central bank. Central bank can interfere in the forex market to mitigate currency devaluation.
In long run, country may go for to fuel productive activities to boost export and substitute import to generate current account surplus and to strengthen currency.
Explaining currency war
Currency war is a byproduct of trade war between two or more trading partners. If there is cutthroat competition in the international market to increase market share and market power, countries deliberately depreciates theirs own currencies to make theirs commodities cheaper than competitors.
If a country deliberately depreciates its own currency to take benefits of market, others also follows the same tactics by imposing import duties on the goods and services entering in theirs market.
Last words on currency crisis and currency war
So far, I have explained the meaning and definition of currency crisis and currency war. Currency crisis occurs when there is huge imbalance in the balance of payments.
On the other hand, currency war is a product of trade war and deliberate currency depreciation to capture more market share.
Simply put, currency crisis and currency war are about the devaluation of currency. In the first case, it happens due to host of reasons; whereas, in second case, it is deliberately done to reap the benefits of market.
This is all about the currency crisis and currency war. In the next blog, Iām going to explain about currency market.
Solved questions on currency crisis and currency war
Let’s take a look at the following solved questions for better clarity and understanding.
Q. 1. What is difference between currency crisis and currency war?
Ans: When any nation deliberately depreciates her own currency either to capture market share or comparative advantage in respect to competitor is called currency war. It happens as a product of trade war between two or more trading nations.
On the other hand, currency crisis is the product of huge imbalance in the balance of payments.
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