The US Treasury Department has declared China as a currency manipulator.This move comes after China allowed the yuan to suddenly depreciate or lose value relative to the dollar.
In retaliation,the US has also announced that it would approach the International Monetary Fund(IMF) to eliminate the unfair competitive advantage created by China’s latest actions.
Foreign Exchange Rate is the amount of domestic currency that must be paid in order to get a unit of foreign currency.According to Purchasing Power Parity theory,the foreign exchange rate is determined by the relative purchasing power of the two currencies.
In an ideal world,exchange rate for any currency would be determined by the interplay of its demand and supply.
However,most governments and central banks are bothered about generating more growth and employment at home.A weaker domestic currency comes in very handy when governments are trying to attract foreign demand and boost exports.
Further.China’s economic growth has been essentially fuelled by exporting to the world.
The US Treasury department defines currency manipulation as when countries deliberately influence the exchange rate between their currency and the US dollar to gain unfair competitive advantage in international trade.
Further,this is the first time that the US has labeled a country a manipulator since the 1990s when China was also the target. Officially,the designation requires the US government to seek negotiations with the government accused of manipulation.