What is the concept of currency manipulation?
The term “currency manipulation” (Currency Manipulation) is understood by the US Treasury Department as the act of a country intentionally adjusting the exchange rate to affect the balance of payments or create an unfair competitive advantage in international trade.
Under the Trade and Competitiveness Act of 1988 and the Trade Facilitation and Enforcement Act of 2015, the U.S. Treasury Department publishes semiannual reports on the economic and foreign exchange policies of major trading partners in May and October. If any partner has a large trade surplus with the United States and a large current account surplus, the United States will conduct an in-depth analysis to consider whether the country is manipulating its currency.
Typically, currency manipulation is done by controlling the supply and demand of a currency through measures such as:
- Devaluation: When a country deliberately reduces the value of its currency relative to foreign currencies, its exports become cheaper in the international market, thereby boosting exports.
- Appreciation: On the contrary, some countries may increase the value of their currency to attract investment capital or stabilize the domestic economy.
Learn what currency manipulation is?
What is trade surplus and current account surplus?
Trade Surplus
A trade deficit is an economic indicator that reflects a positive trade balance, where exports exceed imports. This occurs when money flows into the country from international markets. Conversely, a trade deficit represents a negative balance, with money flowing out.
Current Account Surplus
The current account balance reflects positive net income and international trade flows. Conversely, a current account deficit occurs when imports or investment exceeds them.
In the balance of payments, transactions of goods and services between domestic and international residents are recorded: payments from domestic residents to foreign countries are recorded as “debits,” and vice versa as “credits.” When the total value of the “credits” is greater than the “debits,” the country has a current account surplus.
Current account includes: balance of trade in goods (import and export); balance of trade in goods (transport, services, tourism, investment, remittances); transfers.
When will it be labeled a currency manipulator? What are the criteria for being labeled?
The United States has specific criteria for determining whether a country is labeled a “currency manipulation” or not. These criteria are outlined in the Omnibus Trade and Competitiveness Act of 1988 and the Trade Facilitation and Enhancement Act of 2015. The US Treasury Department is responsible for evaluating and making the determination.
According to periodic reports of the US Treasury Department, a country is considered to be currency manipulation Gas has the following 3 criteria:
Bilateral trade surplus with the US exceeds $20 billion
This means that the country exports significantly more than it imports from the US.
Global current account surplus exceeds 2% GDP
The current account measures the flow of money between a country and the world, including imports and exports of goods and services and income flows.
If a country has a very high current account surplus, it shows that it is benefiting from an imbalance in international trade.
Foreign exchange intervention exceeds 2% of GDP in the past 12 months
If a country regularly buys or sells foreign currency (such as the US dollar) to devalue or increase the value of its domestic currency, it may be considered market intervention.
This action is aimed at maintaining an exchange rate favorable to exports or controlling capital flows.
Criteria for labeling currency manipulation
Consequences, impacts and political-economic implications of being labeled
Consequences – effects
- Mandatory Dialogue: The US Treasury Department requires the labeled country to negotiate changes in monetary policy.
- Economic pressure: If consensus is not reached, the US could impose sanctions such as higher tariffs or other trade measures.
- Reputational impact: being labeled a currency manipulator can affect a country's image in international markets, reducing investor confidence.
- Trade tensions: causing conflicts with other countries, especially those affected by trade imbalances.
- Sanctions: Countries suspected of currency manipulation may be subject to economic sanctions from the international community.
- Financial instability: excessive intervention can undermine confidence in the currency and disrupt financial markets.
Political and economic significance
The attachment "currency manipulation” is often not just an economic issue but also reflects political and trade tensions between the US and the accused country.
When a country is placed on the list currency manipulation, the United States could impose sanctions such as increased import duties or countervailing duties on products deemed to receive unfair subsidies from foreign governments. Under the proposed rule, countervailing duties could be imposed when a country deliberately devalues its currency against the dollar to support its exports.
In its most recent report in October 2018, the US Treasury Department criticized China’s trade and currency policies but did not conclude that Beijing had improperly devalued the yuan. The US also added China, along with Germany, India, Japan, South Korea and Switzerland, to its watch list of countries at risk. currency manipulation.
Those largest capitalization company in Vietnam are often more resilient to market fluctuations, thanks to strong financial resources and long-term business strategies.
The political and economic significance of currency manipulation
How to monitor currency manipulation
To currency manipulation monitoring, coordination among international organizations, countries, and financial authorities is needed. Here are some effective ways to monitor and prevent currency manipulation:
Track key economic indicators
Bilateral trade balance
- Compare import and export values between two countries, especially with the United States (one of the countries that closely monitors this issue).
- If a country has a large trade surplus, that could be a sign to watch.
Current account
- Monitors the imbalance of capital inflows and outflows of a country.
- Large current account surpluses may reflect manipulative policies aimed at maintaining a trade advantage.
Exchange rate
- Monitor for unusual fluctuations in exchange rates. A country may be suspected if its exchange rate does not reflect market factors.
Monitoring foreign exchange intervention activities
Data from central banks
- Tracks foreign exchange transactions conducted by central banks.
- If a country regularly buys or sells foreign currency on a large scale, it may be an act of manipulation.
Foreign exchange reserves
- Check the change in a country's foreign exchange reserves.
- A sudden increase or decrease can be a sign of market intervention.
Use legal tools and periodic reporting
Monitoring report from the US
- The US Treasury Department publishes periodic reports (every six months) on the monetary and foreign exchange policies of major trading partners.
- The report is based on three criteria: bilateral trade surplus, current account and foreign exchange intervention.
Monitoring system from IMF
- The International Monetary Fund (IMF) has tools to assess national monetary and trade policies to detect signs of manipulation.
- The IMF can demand data transparency and policy advice if manipulation is suspected.
International and regional cooperation
Trade Agreements: Include anti-currency manipulation provisions in bilateral or multilateral trade agreements.
Transparency Mechanism: Encourage countries to publicly disclose fiscal, monetary policies and economic data to increase transparency.
Technology and data analytics
Big Data Analytics
- Using artificial intelligence and data analytics to detect currency manipulation trends.
- Historical and real-world data can be compared to find anomalies.
Financial Market Monitoring: Monitor global foreign exchange transactions to identify unusual or potentially manipulative trades.
If you are a new investor, risk management and proper capital allocation are very important. You can refer to how to invest small amount of money effectively to build a strategy that fits the available capital.
Apply deterrent measures
Watchlist: Put suspect countries on the watchlist to increase pressure for policy adjustments.
Sanctions: If a country is determined to be a currency manipulator, tariffs, trade restrictions, or other legal measures may be imposed.
Currency manipulation tricks are increasingly sophisticated, significantly affecting the global financial market. To update the latest news on finance, investment and markets, you can visit here.
Final conclusion is supervision currency manipulation requires a combination of economic data analysis, policy transparency, and international cooperation. Organizations such as the IMF, the WTO, and major countries such as the United States play an important role in maintaining order and fairness in global financial markets.
If you need a more detailed roadmap or want to learn about a specific organization's role in monitoring, LiveTrade Pro ready to support!
