Understanding Currency Manipulation and its Economic Impact

The yen jumped against the dollar at the end of April, causing some pundits to accuse Japanese financial authorities of manipulating the market.  

Currency manipulation is, at its core, a government-orchestrated attempt to cheat in the global economic game. It provides an artificial advantage to the manipulating country, while simultaneously harming the economies of others. 

As a participant in the foreign exchange market, understanding currency manipulation equips you with the knowledge to navigate its complexities. By being aware of its methods and potential impact, you can make informed trading decisions and mitigate the risks associated with manipulated currencies. 

What is currency manipulation?

Currency manipulation refers to government interventions aimed at artificially influencing the value of their currency in the foreign exchange market. It can be achieved through various methods, including the following.

• Direct intervention: Central banks can directly buy or sell foreign currencies in the open market, effectively pushing the exchange rate up or down. This can be used to make a country’s exports cheaper and imports more expensive, potentially boosting domestic production and competitiveness.
• Quantitative easing (QE): While primarily intended to stimulate economic growth, excessive QE can lead to currency depreciation as the increased money supply weakens its value. This can be a form of indirect manipulation, particularly if targeted towards specific currencies.
• Currency pegs: Fixing a currency’s exchange rate to another currency or basket of currencies can distort market forces. This artificially cheapens the pegged currency, giving exporters an unfair advantage while making imports more expensive.

Consequences of currency manipulation

Currency manipulation, while often driven by short-term economic goals, can have significant and detrimental long-term consequences.

• Trade imbalances: Artificially cheapened currencies can lead to increased exports and decreased imports, creating trade surpluses for the manipulating country. This can harm the export industries of other nations, leading to job losses and economic hardship.
• Market distortions: Currency manipulation disrupts the natural balance of supply and demand in the foreign exchange market, leading to inefficiencies and unfair competition. This can discourage foreign investment and hinder global economic growth.
• Inflationary pressures: A weaker domestic currency can lead to higher import prices, potentially fuelling inflation within the manipulating country. This can erode consumer purchasing power and destabilise the overall economy.

What currency manipulation means for traders

Currency manipulation adds another layer of complexity to the already dynamic world of foreign exchange trading. While individual traders cannot single-handedly combat manipulation, they can be aware of its potential impact and take precautions. At the most basic level, you can follow reliable financial news sources and major economic data releases to better understand the broader context of currency movements. 

Moreover, you should analyse the markets for unusual activity. Significant and sudden price movements can be a cause for suspicion, particularly when they occur outside of major news events or economic data releases. You can use live price charts on forex trading platforms like Tradu to monitor for unusual spikes or dips. 

Navigating the market amidst manipulation

Currency manipulation is essentially a government-sanctioned attempt to rig the global economic playing field. While currency manipulation might provide short-term benefits for the manipulating nation, it creates a ripple effect of harm to other countries and market participants, hindering global economic growth and stability.

While individual traders can’t prevent the practice of currency manipulation, understanding its methods and potential impact equips you with the knowledge to navigate the complexities of the forex market with greater awareness. This allows you to make informed trading decisions and potentially mitigate the risks associated with manipulated currencies.