“It’s a natural thing for a currency to weaken in the face of weaker exports. The International Monetary Fund says the yuan is fairly valued; it is the dollar that is overvalued, ’’ said Inter-Pacific Securities head of research Pong Teng Siew (inset pic).
The race to lower interest rates and possibly weaken currencies to boost growth and exports raises the risk of currency wars. Also known as competitive devaluation, currency wars disrupt the orderly functioning of the foreign exchange market, giving rise to unpredictable movements.
Greater currency volatility increases hedging costs for exporters and importers, and obstruct the flow of trade, currently on a downtrend. Growth, and thus demand for goods and services, will be affected; prices fall as supply exceeds demand, impacting businesses and wages.
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