It’s All Under Control

http://www.bloomberg.com/news/2012-10-23/switzerland-the-other-currency-manipulator.html

Currency intervention was always the right solution for authorities to stabilise the validity and changing level of exchange rate. But why is a stabilised exchange rate more preferable? One of the main reasons is fluctuation of exchange rates depreciates the market confidence and affects the financial market. Moreover, exchange rate uncertainty generates extra costs and reduces profits for firms. As a result, investors will be less willing to invest in foreign financial assets and reluctant to engage in the international trade.

However in recent years, it was discovered that the intervention extended its function to generating profit for banks by different forms of sterilisations. Banks make use of this method to purchase foreign financial assets to lower the value of domestic currency. I personally agree that this might be a feasible stream of revenue for the banking sector, but we should also consider the drawbacks of currency manipulation to prevent harming the economy as a whole. It is indeed the responsibility of corporations to defend the goodwill of a country.

When exchanged rates are adjusted artificially, it is likely that the intervention will induce an unbalanced trade in global, this can be illustrated by the case where China manipulate Yuan and affect US. In addition, the creation of difference in labor costs will create an illusion of a comparative advantage for a given country. These false market signals will result inaccurate forecast and decision made by governments, therefore stakeholders should take serious considerations before executing any forms of manipulations.

Posted in: Uncategorized