URICM - UDAYBHANSINHJI - Regional Institute of Cooperative ...

lowering the value of its national currency in foreign exchange terms. Thecentral bank that succeeds will see its country's export total zoom and willeither narrow (or even eradicate) an existing current-account deficit, or (as isthe case with countries such as Korea and China) will see its currency reservessoar.You see, this war is over the ability to export finished products, to importingnations. It is about keeping your own citizens employed during an extendedeconomic slowdown in global demand, even if that means damaging nationalrelationships. This war will vault the winners into positions of global leadership,while severely penalizing the losers."We're in the midst of an international currency war, a general weakening ofcurrency," says Brazil Finance Minister Guido Mantega. "This threatens usbecause it takes away our competitiveness."Here's how this battle gets fought.Given the budgetary jam U.S. leaders find themselves facing, they understandthat one of the few options they have is to boost American exports by devaluingthe dollar.But other export-driven economies - such as Brazil, South Korea and Japan -don't want to have this happen. They want to stop the drop in the U.S. dollar.And there's only one way to stop this: Print more of their own money and thenuse that additional currency to purchase dollars out in the international currencymarket.Once they have purchased these dollars, they usually park the dollars in U.S.Treasuries, which pay a dividend to their new foreign holder. This has helpedthe U.S. Treasury issue U.S. government debt at historic low interest rates -despite a staggering budgetary gulf that is threatening to widen.As investors, there's an important reality, or rule, to understand about currencywars of this type: Unilateral actions by the central banks that are waging thesecampaigns on behalf of their own government are rarely successful.Surprised? Don't be, for it gets even better. As an investor, you can profit fromthis easy-to-predict outcome.Veteran institutional traders understand this reality. That's why one of theeasiest trades in the professional-investor playbook has always been to goagainst a central bank ... after it has shot its currency wad.E-URICM 16