Yesterday I talked about how governments can use tariffs to take revenge against their currency manipulator enemies, today I want to talk about other methods that can be used to punish so-called currency manipulators. Monetary policy can be one of those methods.
Usually, the currency manipulators tend to depreciate their own currencies against their trade partners in order to gain price advantages when trading with each other. Therefore, to counter such effect, their trade partners should depreciate their currencies as well. Monetary policies can be used to manipulate currency values by controlling the supply of their currencies. Moreover, they also influence the financial market interest rates.
The first step is to lower the base rates, that can help to lower the financial market interest rates and bond yields. When the interest rates decrease, "hot money" will flow out of the country so the price of the currency will decrease. Therefore, such action can cause a currency depreciation directly. However, manipulating interest rates is not a continuous solution as there is a bottom for such policy, as the public has not accepted the idea of negative interest rates fully. Fortunately, there are other methods to influence exchange rates. Every country has foreign currency reserve. They can change their foreign reserve volumes to manipulate their currency values. Moreover, central banks do have controls of the supply of currency, which can influence the price in the forex market.
However, monetary policies that tend to manipulate currency prices can lead to chaos in the financial markets, as governments do not publicly announce their targets about manipulating currency prices, then the policies become unpredictable.
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