Current Debates over Exchange Rates:
Overview and Issues for Congress

Rebecca M. Nelson
Analyst in International Trade and Finance
November 12, 2013
Congressional Research Service
7-5700
www.crs.gov
R43242
CRS Report for Congress
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epared for Members and Committees of Congress

Current Debates over Exchange Rates: Overview and Issues for Congress

Summary
Exchange rates are important in the international economy, because they affect the price of every
country’s imports and exports, as well as the value of every overseas investment. Following the
global financial crisis of 2008-2009 and ensuing economic recession, disagreements among
countries over exchange rates have become more widespread. Some policy leaders and analysts
contend that there is a “currency war” now underway among certain countries.
At the heart of current disagreements is whether or not countries are using exchange rate policies
to undermine free markets and intentionally push down the value of their currency in order to
gain a trade advantage at the expense of other countries. A weak currency makes exports cheaper
to foreigners, which can lead to higher exports and job creation in the export sector. However, if
one country weakens its currency, there can be implications for other countries. In general,
exporters and firms producing import-sensitive goods may find it harder to compete against
countries with weak currencies. However, consumers and businesses that rely on inputs from
abroad may benefit when other countries have weak currencies, because imports may become
cheaper.
The United States has found itself on both sides of the current debates over exchange rates. On
one hand, some Members of Congress and U.S. policy experts argue that U.S. exports and U.S.
jobs have been adversely affected by the exchange rate policies adopted by China, Japan, and a
number of other countries. On the other hand, some emerging markets, including Brazil and
Russia, have argued that expansionary monetary policies in the United States and other developed
countries caused the currencies of developed countries to depreciate, hurting the competitiveness
of emerging markets. More recently, however, emerging-market currencies have started to
depreciate, and now there are concerns about emerging-market currencies becoming too weak
relative to the currencies of some developed economies.
Through the International Monetary Fund (IMF), countries have committed to avoid “currency
manipulation.” There are also provisions in U.S. law to address “currency manipulation” by other
countries. In the context of recent disagreements, neither the IMF nor the U.S. Treasury
Department has determined any country to be manipulating its exchange rate. There are differing
views on why. Some argue that countries have not engaged in policies that violate international
commitments on exchange rates or triggered provisions in U.S. law relating to currency
manipulation. Others argue that currency manipulation has occurred, but that estimating a
currency’s “true” or “fundamental” value is complicated, and that the current international
financial architecture is not effective at responding to exchange rate disputes.
Policy Options for Congress
Some Members of Congress may consider addressing exchange rate issues because they are
concerned about the impact of other countries’ exchange rate policies on the competitiveness of
U.S. products. Recently, concerns have been raised about the impact of Japan’s economic policies
on the value of the yen, and the implications for the U.S. economy. However, there are a number
of potential consequences from taking action on exchange rates that Congress might also want to
consider. For example, U.S. imports from countries with weak currencies may be less expensive
than they would be otherwise; countries may retaliate after being labeled a currency
“manipulator”; and tensions over exchange rates could dissipate as the global economy
strengthens.
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Current Debates over Exchange Rates: Overview and Issues for Congress

If Members did decide to take action, they have a number of options for doing so. Options could
include urging the Administration to address currency disputes at the IMF and in trade
agreements, or passing legislation relating to countries determined to have undervalued exchange
rates, among others. Two bills have been introduced in the 113th Congress related to exchange
rate policies in other countries (H.R. 1276; S. 1114). Representative Levin has also released a
proposal for addressing currency issues in the Trans-Pacific Partnership, a proposed free trade
agreement that the United States is negotiating with Japan and 10 other Asia-Pacific countries.



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Current Debates over Exchange Rates: Overview and Issues for Congress

Contents
Introduction ...................................................................................................................................... 1
The Importance of Exchange Rates in the Global Economy ........................................................... 2
What is an Exchange Rate? ....................................................................................................... 2
Impact on International Trade and Investment .......................................................................... 3
International Trade .............................................................................................................. 3
International Investment ...................................................................................................... 4
Types of Exchange Rate Policies ............................................................................................... 4
Exchange Rate Misalignments .................................................................................................. 6
General Debates over “Currency Wars” .......................................................................................... 7
Specific Debates over Exchange Rates ............................................................................................ 8
Currency Interventions .............................................................................................................. 8
China ................................................................................................................................... 9
Switzerland ........................................................................................................................ 10
Other Countries ................................................................................................................. 11
Debates .............................................................................................................................. 12
Expansionary Monetary Policies ............................................................................................. 14
Quantitative Easing in the United States, UK, and Eurozone ........................................... 14
Japan and “Abenomics” .................................................................................................... 15
Debates .............................................................................................................................. 17
Addressing Disagreements over Exchange Rates .......................................................................... 18
Forums to Potentially Address Disagreements ........................................................................ 19
International Monetary Fund ............................................................................................. 19
World Trade Organization ................................................................................................. 20
Less Formal Multilateral Coordination: The G-7 and the G-20 ........................................ 21
U.S. Law: The 1988 Trade Act .......................................................................................... 22
Trade Promotion Authority and Trade Agreements ........................................................... 23
Responses to Current Disagreements ...................................................................................... 24
Policy Options for Congress .......................................................................................................... 25
Conclusion ..................................................................................................................................... 28

Figures
Figure 1. Map of Exchange Rate Policies by Country ..................................................................... 6
Figure 2. China’s Exchange Rate and Foreign Exchange Reserves .............................................. 10
Figure 3. Switzerland’s Exchange Rate and Foreign Exchange Reserves ..................................... 11
Figure 4. U.S. Dollar-Brazilian Real Exchange Rate .................................................................... 15
Figure 5. U.S. Dollar-Japanese Yen Exchange Rate ...................................................................... 17

Contacts
Author Contact Information........................................................................................................... 28
Acknowledgments ......................................................................................................................... 28

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Current Debates over Exchange Rates: Overview and Issues for Congress

Introduction
Some policy makers and analysts allege that certain countries are using exchange rate policies to
gain an “unfair” trade advantage. They maintain that some countries are purposefully using
various policies to weaken the value of their currency to boost exports and create jobs, but that
these policies come at the expense of other countries. Some political leaders and policy experts
contend that there is a “currency war” in the global economy, as countries compete against each
other to weaken the value of their currencies and boost exports.1
The United States has found itself on both sides of the debate. On one hand, some Members of
Congress and U.S. policy experts argue that U.S. producers and U.S. jobs have been adversely
affected by the exchange rate policies adopted by China, Japan, and a number of other countries.
On the other hand, some emerging markets, including Brazil and Russia, have argued that
expansionary monetary policies in the United States and other major developed countries have
reduced the value of the dollar and other currencies, and thereby have hurt the competitiveness of
emerging markets. More recently, some in the United States have started discussing pulling back
expansionary monetary policies, and emerging-market currencies have started to weaken. There
are now concerns about emerging-market currencies becoming too weak relative to the currencies
of some developed economies.
During the 113th Congress, some Members of Congress have proposed taking action on exchange
rate issues:
• Legislation has been introduced aimed at countries determined to have
fundamentally undervalued or misaligned exchange rates (the Currency Reform
for Fair Trade Act, H.R. 1276; the Currency Exchange Rate Oversight Reform
Act of 2013, S. 1114).
• Some Members have expressed concerns about Japan’s monetary policies and its
effect on exchange rates, which impact the competitiveness of U.S. exports.
These concerns have been raised particularly in the context of the Trans-Pacific
Partnership (TPP) negotiations. TPP is a proposed regional trade agreement that
the United States is negotiating with Japan and 10 other countries in the Asia-
Pacific region.2 In June 2013, 230 Representatives sent a letter to President
Obama urging the Administration to address unfair exchange rate policies in the
TPP, particularly with regards to Japan.3 In September 2013, 60 Senators sent a
letter to the Treasury Secretary, Jacob Lew, and the U.S. Trade Representative,
Michael Froman, asking them to address currency “manipulation” in the TPP and

1 For example, see “Brazil Warns of World Currency War,” Reuters, September 28, 2010; Fred Bergsten, “Currency
Wars, the Economy of the United States, and Reform of the International Monetary System,” Remarks at Peterson
Institute for International Economics, May 16, 2013, http://www.iie.com/publications/papers/bergsten201305.pdf.
2 For more information on TPP, see CRS Report R42694, The Trans-Pacific Partnership Negotiations and Issues for
Congress
, coordinated by Ian F. Fergusson.
3 Representative Mike Michaud, “Majority of House Members Push Obama to Address Currency Manipulation in
TPP,” Press Release, June 6, 2013, http://michaud.house.gov/press-release/majority-house-members-push-obama-
address-currency-manipulation-tpp.
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all future free trade agreements.4 Representative Levin released a specific
proposal to address unfair exchange rate practices in the TPP in July 2013.5
• Some Members have also called on the Administration to address currency issues
in negotiations with the European Union (EU) over a proposed free trade
agreement (the Transatlantic Trade and Investment Partnership [TTIP]) and in
renewal of Trade Promotion Authority (TPA).6 TPA is the authority Congress
grants to the President to enter into certain reciprocal trade agreements and to
have their implementing bills considered under expedited legislative procedures
when certain conditions have been met.7 TPA expired in 2007 and some
Members are looking to renew it to facilitate trade negotiations.
This report provides information on current debates over exchange rates in the global economy. It
offers an overview of how exchange rates work; analyzes specific disagreements and debates; and
examines existing frameworks for potentially addressing currency disputes. It also lays out some
policy options available to Congress, should Members want to take action on exchange rate
issues.
The Importance of Exchange Rates in the Global
Economy

What is an Exchange Rate?
An exchange rate is the price of a country’s currency relative to other currencies. In other words,
it is the rate at which one currency can be converted into another currency. For example, on
August 30, 2013, one U.S. dollar could be exchanged for 0.76 euros (€), 98 Japanese yen (¥), or
0.65 British pounds (£).8 Exchange rates are expressed in terms of dollars per foreign currency, or
expressed in terms of foreign currency per dollar. The exchange rate between dollars and euros on
August 30, 2013, can be quoted as 1.32 $/€ or, equivalently, 0.76 €/$.

4 Senator Debbie Stabenow, “Sixty Senators Urge Administration to Crack Down on Currency Manipulation in Trans-
Pacific Partnership Talks,” Press Release, September 24, 2013,
http://www.stabenow.senate.gov/?p=press_release&id=1171. The U.S. auto industry in particular has been supportive
of efforts to address currency manipulation in TPP. For example, see Michael Stumo, “American Auto Industry
Applauds Senate Currency Letter,” Trade Reform, September 25, 2013.
5 U.S. Representative Sander Levin, “U.S.-Japan Automotive Trade: Proposal to Level the Playing Field,”
http://www.piie.com/publications/papers/levin20130723proposal.pdf.
6 For example, see U.S. Congress, House Ways and Means, U.S. Trade Representative Michael Froman, 113th Cong.,
1st sess., July 18, 2013; U.S. Congress, Senate Finance, Confirmation Hearing on the Nomination of Michael Froman
to be U.S. Trade Representative
, 113th Cong., 1st sess., June 6, 2013. For more on TTIP, see CRS Report R43158,
Proposed Transatlantic Trade and Investment Partnership (TTIP): In Brief, by Shayerah Ilias Akhtar and Vivian C.
Jones. For more information about TPA, see CRS Report RL33743, Trade Promotion Authority (TPA) and the Role of
Congress in Trade Policy
, by J. F. Hornbeck and William H. Cooper.
7 For more on TPA, see CRS Report RL33743, Trade Promotion Authority (TPA) and the Role of Congress in Trade
Policy
, by J. F. Hornbeck and William H. Cooper.
8 Exchange rate data in this report is from the Federal Reserve, unless otherwise noted.
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Consumers use exchange rates to calculate the cost of goods produced in other countries. For
example, U.S. consumers use exchange rates to calculate how much a bottle of French or
Australian wine costs in U.S. dollars. Likewise, French and Australian consumers use exchange
rates to calculate how much a bottle of U.S. wine costs in euros or Australian dollars.
How much a currency is worth in relation to another currency is determined by the supply and
demand for currencies in the foreign exchange market (the market in which foreign currencies are
traded). The foreign exchange market is substantial, and has expanded in recent years. Trading in
foreign exchange markets averaged $5.3 trillion per day in April 2013, up from $3.3 trillion in
April 2007.9
The relative demand for currencies reflects the underlying demand for goods and assets
denominated in that currency, and large international capital flows can have a strong influence on
the demand for various currencies. The government, typically the central bank, can use policies to
shape the supply of its currency in international capital markets.
Different Measures of Exchange Rates

Nominal vs. real exchange rate: The nominal exchange rate is the rate at which two currencies can be
exchanged, or how much one currency is worth in terms of another currency. The real exchange rate measures
the value of a country’s goods against those of another country at the prevailing nominal exchange rate.
Essentially, the real exchange rate adjusts the nominal exchange rate for differences in prices (and rates of
inflation) across countries.

Bilateral vs. effective exchange rate: The bilateral exchange rate is the value of one currency in terms of
another currency. The effective exchange rate is the value of a currency against a weighted average of several
currencies (a “basket” of foreign currencies). The basket can be weighted in different ways, such as by share of
world trade or GDP. The Bank for International Settlements (BIS), for example, publishes data on effective
exchange rates.10
Impact on International Trade and Investment
International Trade
Exchange rates affect the price of every export leaving a country and every import entering a
country. As a result, changes in the exchange rate can impact trade flows. When the value of a
country’s currency falls, or depreciates, relative to another currency, its exports become less
expensive to foreigners and imports from overseas become more expensive to domestic
consumers.11 These changes in relative prices can cause the level of exports to rise and the level
of imports to fall.12 For example, if the dollar depreciates against the British pound, U.S. exports

9 Bank for International Settlements, “Foreign Exchange Turnover in April 2013: Preliminary Global Results,”
Triennial Central Bank Survey, September 2013, https://www.bis.org/publ/rpfx13fx.pdf.
10 For example, see “BIS Effective Exchange Rate Indices,” http://www.bis.org/statistics/eer/.
11 This assumes that changes in the exchange rate are reflected in retail and consumer prices. In practice, there may be
factors that limit the “pass through” of changes in the exchange rates to changes in prices. For example, contracts may
lock in prices of imports and exports for a set amount of time.
12 It may take time for changes in the exchange rate to result in changes in the volume of tradable goods and services.
For example, if imports become more expensive, it may take time for domestic consumers to find suitable domestic or
foreign substitutes.
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become cheaper to UK consumers, and imports from the UK become more expensive to U.S.
consumers. As a result, U.S. exports to the UK may rise, and U.S. imports from the UK may fall.
Likewise, when the value of a currency rises, or appreciates, the country’s exports become more
expensive to foreigners and imports become less expensive to domestic consumers. This can
cause exports to fall and imports to rise. For example, if the dollar appreciates against the
Australian dollar, U.S. exports become more expensive to Australian consumers, and imports
from Australia become less expensive to U.S. consumers. Changes in prices may cause U.S.
exports to Australia to fall and U.S. imports from Australia to rise.
International Investment
Exchange rates impact international investment in two ways. First, exchange rates determine the
value of existing overseas investments. When a currency depreciates, the value of investments
denominated in that currency falls for overseas investors. Likewise, when a currency appreciates,
the value of investments denominated in that currency rises for overseas investors. For example,
if a U.S. investor holds a German government bond denominated in euros, and the euro
depreciates, the value of the bond in U.S. dollars falls, making the investment worth less to the
U.S. investor. In contrast, if the euro appreciates, the value of the German bond in U.S. dollars
rises, and the investment is worth more to the U.S. investor.
Second, exchange rates impact the flow of investment across borders. Changes in the value of a
currency today can shape investors’ future expectations about the value of the currency, which
can have substantial impacts on capital flows. If investors expect a currency to depreciate,
overseas investors may be reluctant to invest in assets denominated in that currency and may
want to sell assets denominated in the currency, in fear that their investments will become less
valuable over time. Likewise, if a currency is expected to rise over time, assets denominated in
that currency become more attractive to overseas investors. For example, a depreciating euro may
deter U.S. investment in the Eurozone, while an appreciating euro may increase U.S. investment
in the Eurozone.13
Types of Exchange Rate Policies
There are two major ways that the price of a country’s currency is determined, or types of
“currency regimes.” First, some governments “float” their currencies. This means they allow the
price of their currency to fluctuate depending on supply and demand for currencies in foreign
exchange markets. Governments with floating exchange rates do not take policy actions to
influence the value of their currencies.
Second, some countries “fix” or “peg” their exchange rate. This means they fix the value of their
currency to another currency (such as the U.S. dollar or euro), a group (or “basket”) of currencies,
or a commodity, such as gold. The government (typically the central bank) then uses various
policies to control the supply and demand for the currency in foreign exchange markets to

13 The Eurozone refers to the 17 European Union (EU) member states that use the euro as their currency: Austria,
Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands,
Portugal, Slovakia, Spain, and Slovenia. The other 10 EU members have yet to adopt the euro or have chosen not to
adopt the euro.
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maintain the set price for the currency. Often, central banks maintain exchange rate pegs by
buying and selling currency in foreign exchange markets, or “intervening” in foreign exchange
markets.
There are pros and cons to having a floating or fixed exchange rate. Fixed exchange rates provide
more certainty in international transactions, but they can make it more difficult for the economy
to adjust to economic shocks and can make the currency more susceptible to speculative attacks.
Floating exchange rates introduce more unpredictability in international transactions and may
deter international trade and investment, but make it easier for the economy to adjust to changes
in economic conditions.
In order to take advantage of the benefits of both fixed and floating exchange rates, many
countries do not adopt a purely fixed or floating exchange rate, but choose a hybrid policy: they
let the currency’s value fluctuate but take action to keep the exchange rate from deviating too far
from a target value or zone. The degree to which they float or peg varies. The optimal choice for
any given country will depend on its characteristics, including its size and interconnectedness to
the country to which it would peg its currency.
Between the end of World War II and the early 1970s, most countries, including the United States,
had fixed exchange rates.14 In the early 1970s, when international capital flows increased, the
United States abandoned its peg to gold and floated the dollar. Other countries’ currencies were
pegged to the dollar, and after the dollar floated, some other countries decided to float their
currencies as well.
In 2012, 35% of countries had floating currencies.15 This includes several major currencies, such
as the U.S. dollar, the euro, the Japanese yen, and the British pound, whose economies together
account for 50% of global GDP.16 Many countries use policies to manage the value of their
currencies, although some manage it more than others. This includes many small countries, such
as Panama and Hong Kong, as well as a few larger economies, such as China, Russia, and Saudi
Arabia. In 2012, 40% of countries used a “soft” peg, which let the exchange rate fluctuate within
a desired range, and 13% of countries used a “hard” peg, which anchors the currency’s value
more strictly, including the formal adoption of a foreign currency to use as a domestic currency
(for example, Ecuador has adopted the U.S. dollar as its national currency).17 No large country
uses a hard peg. Figure 1 depicts the exchange rate policies adopted by different countries.

14 Exchange rates were, in theory, fixed but “adjustable,” meaning that countries could adjust their exchange rates to
correct a “fundamental disequilibrium” in their exchange rate. In practice, it was rare for a country to adjust its
exchange rate outside of a narrow band.
15 IMF, “Annual Report on Exchange Arrangements and Exchange Restrictions,” 2012,
http://www.imf.org/external/pubs/nft/2012/eaer/ar2012.pdf. Exchange rate data on how the exchange rate policies work
in practice (the “de facto” exchange rate policy), which may or may not match the official description of the policy (the
de jure” exchange rate policy). Countries that are members of a currency union (where multiple countries may adopt
use of the same currency, including the Eurozone, the East Caribbean Currency Union, the West African Economic and
Monetary Union, and the Central African Economic Community) are coded according to how the currency is managed.
For example, the euro is a floating currency, and individual members of the Eurozone for this purpose are counted as
having adopted floating exchange rates.
16 IMF, World Economic Outlook Database, April 2013.
17 13% use other managed arrangements that do not fall neatly into a “soft” peg or “hard” peg category, sometimes
because the government changes exchange rate policies frequently.
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Figure 1. Map of Exchange Rate Policies by Country

Source: IMF, “Annual Report on Exchange Arrangements and Exchange Restrictions,” 2012.
Notes: See footnote 15.
Exchange Rate Misalignments
Many economists believe that exchange rate levels can differ from the underlying “fundamental”
or “equilibrium” value of the exchange rate. When an actual exchange rate differs from its
fundamental or equilibrium value, the currency is said to be misaligned. More specifically, when
the actual exchange rate is too high, the currency is said to be overvalued; when the actual rate is
too low, the currency is said to be undervalued.
Considerable debate exists about what the fundamental or equilibrium value of a currency is and
how to define or calculate currency misalignment.18 For example, some economists believe that a
currency is misaligned when the exchange rate set by the government, or the official rate, differs
from what would be set by the market if the currency were allowed to float. By this reasoning,
governments that take policy actions to sustain an exchange rate peg, such as intervening in
currency markets, most likely have misaligned currencies. Additionally, this view suggests that
floating currencies, by definition, cannot be misaligned, since their values are determined by
market forces.

18 For example, see Enzo Cassino and David Oxley, “Exchange Rate Valuation and its Impact on the Real Economy,”
New Zealand Treasury, March 2013,
http://www.rbnz.govt.nz/research_and_publications/seminars_and_workshops/mar2013/5200821.pdf; Rebecca L.
Driver and Peter F. Westaway, “ Concepts of Equilibrium Exchange Rates,” Bank of England, Working Paper No. 248,
2004, http://www.bankofengland.co.uk/publications/Documents/workingpapers/wp248.pdf.
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For other economists, a currency can be misaligned even if it is a floating rate. This is the case if
the exchange rate differs from its long-term equilibrium value, which is based on economic
fundamentals and eliminates short-term factors that can cause the exchange rate to fluctuate.
Defining or estimating an equilibrium exchange rate is not a straightforward process and is
complex. Economists disagree on the factors that determine an equilibrium exchange rate, and
whether the concept is a valid one, particularly when applied to countries with floating exchange
rates. Economists have developed a number of models for calculating differences between actual
exchange rates and equilibrium exchange rates. Estimates of whether a currency is misaligned,
and if so, by how much, can vary widely depending on the model used.19
General Debates over “Currency Wars”
Amid heightened concerns about slow growth and high unemployment in many countries,
disagreements over exchange rate policies have broadened after the global financial crisis. In
2010, Brazil’s finance minister, Guido Mantega, declared that a “currency war” had broken out in
the global economy.20
At the heart of current disagreements is whether or not countries are using policies to
intentionally push down the value of their currency in order to gain a trade advantage at the
expense of other countries. A weak currency makes exports cheaper to foreigners and imports
more expensive to domestic consumers. This can lead to higher production of exports and import-
competing goods, which could help spur export-led growth and job creation in the export sector.
However, if one country weakens its currency, there can be negative implications for certain
sectors in other countries. In general, a weaker currency in one country can hurt exporters in other
countries, since their exports become relatively more expensive and may fall as a result.
Additionally, domestic firms producing import-competing goods may find it harder to compete
with imports from countries with weak currencies, since weak currencies lower the cost of
imports. Under certain circumstances, policies used to drive down the value of a currency in one
country can cause other countries to run persistent trade deficits (imports exceed exports) that can
be difficult to adjust and can be associated with the build-up of debt.
For these reasons, some economists view efforts to boost exports through a weaker exchange rate
as “unfair” to other countries and a type of “beggar-thy-neighbor” policy—the benefit the country
gets from the policy comes at the expense of other countries. These views are particularly rooted
in the experience in the 1930s, during which, some economists argue, countries devalued their
currencies to boost exports, in response to widespread high unemployment and negative
economic conditions.21 The devaluations in the 1930s are referred to as “competitive

19 For example, see “Misleading Misalignments,” Economist, June 21, 2007; Peter Isard, “Equilibrium Exchange Rates:
Assessment Methodologies,” IMF Working Paper WP/07/296, December 2007,
http://www.imf.org/external/pubs/ft/wp/2007/wp07296.pdf; Treasury Department, “Semiannual Report on International
Economic and Exchange Rate Policies,” December 2006, Appendix 2, Exchange Rate Misalignment: What the Models
Tell Us and Methodological Considerations,” http://www.treasury.gov/resource-center/international/exchange-rate-
policies/Documents/2006_Appendix-2.pdf.
20 For example, see “Brazil Warns of World Currency War,” Reuters, September 28, 2010.
21 For example, see Beth A. Simmons, Who Adjusts? Domestic Sources of Foreign Economic Policy During the
Interwar Years.
(Princeton, NJ: Princeton University Press, 1994). Not all economists characterize changes in exchange
rates during the 1930s as competitive devaluations. For example, some argue that countries were forced to devalue
(continued...)
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devaluations,” since a devaluation in one country was often offset by a devaluation in another
country, making it difficult for any country to gain a lasting advantage.22 Some economists view
the competitive devaluations of the 1930s as detrimental to international trade, and, in addition to
protectionist trade policies, as exacerbating the Great Depression.
Many economists disagree that “currency wars” and competitive devaluations are currently
underway in the global economy and argue that, if they are, they are not necessarily bad for the
global economy. Because currency devaluations can often involve printing domestic currency, or
implementing expansionary monetary policies, they can stimulate short-term economic growth.23
If enough countries engage in currency interventions, then there may be no net change in relative
exchange rate levels and the simultaneous currency interventions may help reflate the global
economy and boost global economic growth. Economists of this viewpoint argue that competitive
devaluations of the 1930s did not cause the Great Depression and, in fact, actually helped end it.24
Additionally, a weak currency in one country does not have an unambiguous negative effect on
other countries. Instead, consumers and certain sectors may benefit when other countries have
weak currencies. In particular, consumers that purchase imports from abroad benefit when other
countries have weak currencies, because imports become cheaper. Additionally, businesses that
rely on inputs from overseas also benefit when other countries have weak currencies, by lowering
the costs of inputs and thus the overall cost of production.
Specific Debates over Exchange Rates
In current debates about exchange rates and whether countries are engaged in unfair currency
policies to weaken their currencies, two major types of concerns have been raised: first, concerns
about countries engaged in interventions in foreign currency markets, and second, concerns about
the effects of expansionary monetary policies in some developed countries on exchange rate
levels.
Currency Interventions
Governments have various mechanisms they can use to weaken, or devalue, their currency, or
sustain a lower exchange rate than would exist in the absence of government intervention. One
way is intervening in foreign exchange markets or, more specifically, selling domestic currency in
exchange for foreign currency. These interventions increase the supply of domestic currency
relative to other currencies in foreign exchange markets, pushing the price of the currency down.
The foreign currency is typically then invested in foreign assets, most commonly government
bonds.

(...continued)
because they were running out of gold reserves. See Douglas A. Irwin, Trade Policy Disaster: Lessons from the 1930s
(Cambridge, MA: MIT Press, 2012).
22 Depreciation is typically used to refer to a currency weakening due to market forces. When a government undertakes
specific policies to weaken the value of its currency, it is typically referred to as a devaluation.
23 For example, see Matthew O’Brien, “Currency Wars, What Are They Good For? Absolutely Ending Depressions,”
The Atlantic, February 5, 2013.
24 Barry Eichengreen, “Currency War or International Policy Coordination?,” University of California, Berkeley,
January 2013, http://emlab.berkeley.edu/~eichengr/curr_war_JPM_2013.pdf.
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Concerns about currency interventions are not new. For nearly a decade, various policy makers
and analysts have raised concerns about China’s interventions in foreign exchange markets to
maintain, in their view, an undervalued currency relative to the U.S. dollar. Since the global
financial crisis, however, concerns about currency interventions have become more widespread,
as more countries, including Switzerland and others, have intervened in foreign exchange
markets, in the view of some analysts, to lower the value of their currency.25
China26
Over the past decade, the Chinese government has tightly managed the value of its currency, the
renminbi (RMB) or yuan, against the U.S. dollar.27 Some policy makers and analysts believe that
China’s currency policies keep the RMB undervalued relative to the U.S. dollar. They argue that
China’s policies give Chinese exports an “unfair” trade advantage against U.S. exports and are a
major contributing factor to the U.S. trade deficit with China.
In 1994, China began to peg its currency to the U.S. dollar and kept it pegged to the U.S. dollar at
a constant rate through 2005. In July 2005, it moved to a managed peg system, in which the
government allowed the currency to fluctuate within a range, and the currency began to
appreciate. In 2008, China halted appreciation of the RMB, due to concerns about the effects of
the global financial crisis on Chinese exports. In 2012, China again allowed more flexibility in
the value of the RMB against the U.S. dollar. Between 2005 and the end of 2012, the RMB
appreciated by almost 25% against the dollar (Figure 2).28
The Chinese government has used various policies, including intervening in foreign currency
markets and capital controls, to manage this appreciation of the RMB against the U.S. dollar. It
does so primarily by printing yuan and selling it for U.S. currency and assets denominated in U.S.
dollars, usually U.S. government bonds. It also manages the value of its exchange rate through
capital controls that limit buying and selling of RMB.29 As China has engaged in currency
interventions, its holdings of foreign exchange reserves have increased, from $715 billion in the
first quarter of 2005 to $3,463 billion in the first quarter of 2013 (Figure 2), equivalent to about
38% of China’s GDP.30 Some economists view the sustained, substantial increase in foreign
exchange reserves as evidence that the Chinese government keeps the value of the RMB below
what it would be if the RMB were allowed to float freely.
More recently, some economists are starting to question whether the yuan is still undervalued
against the U.S. dollar when adjusting for differences in price levels (the real exchange rate), and

25 For example, see Alan Beattie, “Hostilities Escalate to Hidden Currency War,” Financial Times, September 27,
2010.
26 For more on China’s currency, see CRS Report RL32165, China’s Currency: Economic Issues and Options for U.S.
Trade Policy
, by Wayne M. Morrison and Marc Labonte.
27 The official name of China’s currency is the renminbi (RMB), which is denominated in yuan units. Both RMB and
yuan are used interchangeably to refer to China’s currency.
28 Change in the nominal exchange rate (not adjusted for differences in inflation between China and the United States).
29 The RMB is largely convertible on a current account (trade) basis, but not on a capital account basis, meaning that
foreign exchange in China is not regularly obtainable for investment purposes. In other words, it can be difficult to
purchase investments denominated in RMB.
30 IMF, International Financial Statistics, 2013; IMF, World Economic Outlook, April 2013.
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if so, by how much, particularly as inflation has increased in China.31 They point to the fact that
foreign exchange reserves have not grown as quickly since 2011 as some evidence of this
adjustment. In July 2012, the IMF changed its assessment of the RMB’s value from significantly
undervalued to moderately undervalued.32
Figure 2. China’s Exchange Rate and Foreign Exchange Reserves

Source: Federal Reserve; IMF, International Financial Statistics.
Note: For the graph on the left, an increase represents an appreciation of the RMB relative to the U.S. dol ar.
Switzerland
Before the global financial crisis of 2008-2009, Switzerland had a floating exchange rate. During
the crisis, the Swiss franc was viewed as a “safe haven” currency, or a currency that investors
trusted more than others and would therefore buy in times of uncertainty.33 Increased investor
demand for the Swiss franc put upward pressure on the currency, which, in turn, raised concerns
for the Swiss government about the competitiveness of Swiss exports. In 2009 and 2010, the
Swiss central bank (the National Bank of Switzerland) intervened in foreign exchange markets to
prevent or limit appreciation of the Swiss franc against the euro, by selling Swiss francs for
foreign currencies.34 When a worsening of the Eurozone crisis put additional upward pressure on
the Swiss franc, the Swiss central bank announced in September 2011 that it would buy
“unlimited quantities” of foreign currency to keep the Swiss franc from appreciating above a
specific value (Figure 3).35 As a result of its currency interventions, Switzerland’s foreign
exchange reserves increased more than tenfold, from $46 billion in the fourth quarter of 2008 to

31 “The Cheapest Thing Going is Gone,” Economist, June 15, 2013.
32 IMF, “IMF Executive Board Concludes 2012 Article IV Consultation with People’s Republic of China,” Public
Information Notice No. 12/86, July 24, 2012, http://www.imf.org/external/np/sec/pn/2012/pn1286.htm; Simon
Rabinovitch, “IMF Says Renminbi ‘Moderately Undervalued’,” Financial Times, July 25, 2012.
33 Michael Bordo, Owen F. Humpage, Anna J. Schwartz, “Foreign-Exchange Intervention and the Fundamental
Trilemma of International Finance: Notes for Currency Wars,” VoxEU, June 18, 2012,
http://www.voxeu.org/article/notes-currency-wars-trilemma-international-finance.
34 U.S. Department of the Treasury, Office of International Affairs, “Report to Congress on International Economic and
Exchange Rate Policies,” July 8, 2010, http://www.treasury.gov/resource-center/international/exchange-rate-
policies/Documents/Foreign%20Exchange%20Report%20July%202010.pdf.
35 Swiss National Bank Press Release, September 6, 2011,
http://www.snb.ch/en/mmr/reference/pre_20110906/source/pre_20110906.en.pdf.
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$470 billion in the first quarter of 2013 (Figure 3), about 73% of Swiss GDP.36 Before the
financial crisis, the Swiss central bank had last intervened in the foreign exchange market in
1995.37
Many economists argue that the recent interventions by the Swiss central bank have held the
value of the Swiss franc lower than it would be otherwise (if the currency floated freely and the
Swiss central bank did not intervene in foreign exchange markets). They argue that this has given
Swiss exports an advantage, helping Switzerland maintain a trade surplus and one of the lowest
unemployment rates in Europe.38 However, some economists have noted that Switzerland’s
trading partners have generally not “kicked up much fuss” over its interventions, and that
Switzerland’s interventions are the “overlooked” currency war in Europe.39 This could be due to
the small size of the Swiss economy, and a perception held by some that Swiss interventions are a
defensive measure against developments in the rest of Europe that are beyond its control.
Figure 3. Switzerland’s Exchange Rate and Foreign Exchange Reserves

Source: European Central Bank; IMF, International Financial Statistics.
Note: For the graph on the left, an increase represents an appreciation of the Swiss franc relative to the euro.
Other Countries
Other examples of interventions to weaken currencies since the global financial crisis include,
among others:
Japan, which sold yen in foreign exchange markets in 2010 and 2011. Japan’s
interventions in March 2011 were unusual in that they were supported with
corresponding interventions by the other G-7 countries to weaken the yen. A

36 IMF, International Financial Statistics, 2013; IMF, World Economic Outlook, April 2013.
37 Michael Bordo, Owen F. Humpage, Anna J. Schwartz, “Foreign-Exchange Intervention and the Fundamental
Trilemma of International Finance: Notes for Currency Wars,” VoxEU, June 18, 2012,
http://www.voxeu.org/article/notes-currency-wars-trilemma-international-finance.
38 Daniel Gros, “An Overlooked Currency War in Europe,” VoxEU, October 11, 2012,
http://www.voxeu.org/article/overlooked-currency-war-europe.
39 Ibid., “Positive-Sum Currency Wars,” Economist, February 14, 2013.
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crisis in Japan (earthquake, tsunami, and threat of nuclear crisis) in March 2011
had sparked a sharp appreciation of the yen, which some feared would throw the
world’s third-largest economy back into recession, prompting the coordinated
interventions;40
South Korea, which is believed to have intervened in currency markets
intermittently to hold down the value of the won in the latter part of 2012 and
early 2013;41 and
New Zealand, whose central bank revealed in May 2013 that it had intervened in
currency markets to stem appreciation of its currency, the New Zealand dollar
(nicknamed the kiwi).42
More generally, according to a December 2012 study by the Peterson Institute of International
Economics (PIIE), more than 20 countries have cumulatively increased their foreign exchange
reserves by nearly $1 trillion annually for several years, mainly through interventions in foreign
currency markets, and as a result have been able to keep their currencies “substantially
undervalued.”43 The study identifies China, Denmark, Hong Kong, South Korea, Malaysia,
Singapore, Switzerland, and Taiwan as most heavily engaged in currency interventions.
Debates
A number of countries are actively intervening, or have recently intervened, in foreign exchange
markets to lower the value of their currencies, and there are different views among economists
about the consequences of these interventions for other countries. Some economists argue that
currency interventions have helped countries give their exports a boost at the expense of other
countries. The December 2012 study by the PIIE estimates that currency interventions have
caused the U.S. trade deficit to increase by $200 billion to $500 billion per year and the U.S.
economy to lose between 1 million and 5 million jobs.44 The study also argues that currency
interventions have adversely affected the economies of Australia, Brazil, Canada, the Eurozone,
India, and Mexico, in addition to a number of other developing economies.
Other economists are skeptical that one country’s interventions in foreign exchange markets have
had adverse consequences for other countries. For example, some economists argue that
interventions in foreign exchange markets by other countries change the composition of output in

40 Peter Garnham and David Oakley, “G7 Nations Co-ordinate $25bn Yen Sell-Off,” Financial Times, March 18, 2011.
41 According to the April 2013 Treasury report on exchange rates, the Korean government does not publish intervention
data, but many market participants believe that the Korean authorities intervened in currency markets in the latter part
of 2012 and early 2013. See U.S. Department of the Treasury, Office of International Affairs, “Report to Congress on
International Economic and Exchange Rate Policies,” April 12, 2013, http://www.treasury.gov/resource-
center/international/exchange-rate-policies/Documents/Foreign%20Exchange%20Report%20April%202013.pdf.
42 Alan Beattie, “Hostilities Escalate to Hidden Currency War,” Financial Times, September 27, 2010; U.S.
Department of the Treasury, Office of International Affairs, “Report to Congress on International Economic and
Exchange Rate Policies,” April 12, 2013, http://www.treasury.gov/resource-center/international/exchange-rate-
policies/Documents/Foreign%20Exchange%20Report%20April%202013.pdf; Rebecca Howard, “NZ Central Bank
Admits Currency Intervention to Dampen Dollar,” Dow Jones, May 9, 2013.
43 C. Fred Bergsten and Joseph E. Gagnon, “Currency Manipulation, the US Economy, and the Global Economic
Order,” Peterson Institute for International Economics Policy Brief 12-25, December 2012,
http://www.iie.com/publications/interstitial.cfm?ResearchID=2302.
44 Ibid.
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the United States (particularly the size of the export and domestic-oriented sectors), but do not
reduce the overall employment or output levels in the U.S. economy. Some economists also
question whether currency interventions have long-lasting effects on exchange rate levels,
particularly for countries with floating currencies. They argue that the large size of international
capital flows overwhelms, in the long term, government purchases and sales of foreign
currencies, and that other economic fundamentals, such as interest rates, inflation rates, and
overall economic performance, have much greater effects on exchange rate levels.
Still other economists argue that it is hard to make generalizations about the effects of currency
interventions, and that, depending on the specific circumstances, currency interventions may or
may not be “fair” policies.45 For example, they argue that relevant factors can include:
Does the government intervene in currency markets to sometimes strengthen
and sometimes weaken its currency, or does it always intervene to weaken its
currency?
“Two-way” interventions (sometimes strengthening the currency,
sometimes weakening the currency) may be evidence that the country is using
currency interventions to sustain a pegged exchange rate that is close to its long-
term fundamental or equilibrium value. Some economists argue that “one-way”
interventions (always selling domestic currency) may be evidence that the
government is using interventions to sustain a currency that is below the
currency’s fundamental or equilibrium value.
Does the government intervene periodically, or on a continual basis? Periodic
interventions may smooth potentially disruptive short-term fluctuations in the
exchange rate and help the country build foreign exchange reserves, which can
help it guard against economic crises. Sustained, or long-term, interventions may
create negative distortions in the global economy.
Does the government allow the intervention to increase its domestic money
supply, or does the government “sterilize” the intervention to prevent an
increase in its domestic money supply?
When some governments intervene in
currency markets by selling domestic currency, they allow the domestic money
supply to increase. This is called an unsterilized intervention. When other
countries (such as China and, sometimes, Switzerland) intervene, they do not
allow their money supply to increase. Instead, when they sell domestic currency
in exchange for foreign currency, they then sell a corresponding quantity of
domestic government bonds to remove the extra domestic currency from
circulation. This is called a sterilized intervention. It may matter to other
countries whether the intervening country sterilizes the intervention or not. For
example, increasing the money supply may help increase domestic demand,
which in certain circumstances can cause consumers to buy more, not fewer,
imports from other countries. Additionally, an increase in the money supply may
cause prices to rise in the medium term. This may mean that the exchange rate
adjusted for inflation (the real exchange rate) may not change in the medium
term (after prices adjust), even if the nominal exchange rate (the exchange rate
not adjusted for inflation) falls.

45 For example, see Matthew O’Brien, “Currency Wars, What Are They Good For? Absolutely Ending Depressions,”
The Atlantic, February 5, 2013; “Trial of Strength,” Economist, September 23, 2010.
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Expansionary Monetary Policies
In addition to intervening directly in foreign exchange markets, governments can weaken the
value of their currency through expansionary monetary policies. Monetary policy is the process
by which a government (usually the central bank) controls the supply of money in an economy,
such as by changing the interest rates through buying and selling government bonds. Changes in
the money supply can impact the value of the currency. For example, increasing the supply of
British pounds can cause the price of the pound to fall.
Some emerging markets, particularly Brazil, have been critical of the expansionary monetary
policies adopted by the United States, the United Kingdom, and the Eurozone in response to the
global financial crisis of 2008-2009. A number of countries have also raised concerns about
Japan’s monetary policies, following a major policy shift in late 2012 and early 2013.
Quantitative Easing in the United States, UK, and Eurozone46
The United States, the United Kingdom, and, to a lesser extent, the Eurozone adopted
expansionary monetary policies to respond to the economic recession following the global
financial crisis of 2008-2009. In addition to cutting interest rates, the Federal Reserve, the Bank
of England, and the European Central Bank (ECB) used quantitative easing to provide further
monetary stimulus. Quantitative easing is an unconventional form of monetary policy that
expands the money supply through government purchases of assets, usually government bonds.
Quantitative easing is typically used when more conventional monetary policy tools are no longer
feasible, for example, when short-term interest rates cannot be cut because they are already near
zero.
Some emerging markets have argued that because the U.S. dollar, the British pound, and the euro
are floating currencies, expansionary policies in these countries have caused these currencies to
depreciate against the currencies of emerging markets. For example, Brazil has argued that
quantitative easing in developed countries was a key factor in causing its currency (the real) to
appreciate by more than 25% against the dollar between the start of 2009 and the end of the third
quarter of 2010 (see Figure 4), when Brazil’s finance minister, Guido Mantega, declared that a
currency “war” had broken out in the global economy.47 Brazil imposed some short-term controls
on inflows of capital into Brazil (capital controls) to stem appreciation of the real.48
In response to the concerns of emerging markets, many policy makers and analysts have argued
that the Federal Reserve, the Bank of England, and the ECB adopted expansionary monetary
policies for domestic purposes (combatting the recession), and that any effect on their currencies
was a side-effect or by-product of the policy.49 For example, during a Senate Banking Committee
hearing in February 2013, the Chairman of the Federal Reserve, Ben Bernanke, stressed that the
Federal Reserve is not engaged in a currency war or targeting the value of the U.S. dollar.50

46 For more on quantitative easing in the United States, see CRS Report R42962, Federal Reserve: Unconventional
Monetary Policy Options
, by Marc Labonte.
47 For example, see “Brazil Warns of World Currency War,” Reuters, September 28, 2010. In this report, exchange rate
data is from the Federal Reserve unless otherwise noted.
48 Samantha Pearson, “Brazil Launches Fresh ‘Currency War’ Offensive,” Financial Times, March 15, 2012.
49 For example, see “Phoney Currency Wars,” Economist, February 16, 2013.
50 U.S. Congress, Senate Banking, Housing, and Urban Affairs, Hearing on the Semi-Annual Monetary Policy Report,
(continued...)
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Instead, he emphasized that monetary policy is being used to achieve domestic economic
objectives (high employment and price stability). He also stressed that monetary policies to
strengthen aggregate demand in the United States are not “zero-sum,” because they raise the
demand for the exports of other countries.
The concerns of emerging markets about the effects of quantitative easing have eased in recent
months. As developed countries have started discussing rolling back expansionary monetary
policies, the real has weakened substantially against the U.S. dollar (see Figure 4). Brazil’s
government, in fact, has started expressing concerns about the real becoming too weak, and in
August 2013, intervened in foreign currency markets to strengthen its currency.51 The concerns of
emerging-market economies about the potential rollback of quantitative easing policies in
developed countries, including the United States, were a major topic of discussion at the
September 2013 G-20 summit in St. Petersburg, Russia.52
Figure 4. U.S. Dollar-Brazilian Real Exchange Rate

Source: Federal Reserve.
Note: An increase represents an appreciation of the Brazilian real relative to the U.S. dollar.
Japan and “Abenomics”
Concerns have also been recently raised about major changes in Japan’s monetary policy and
their effects on the value of the yen. Elected in December 2012, Prime Minister Shinzo Abe has
made it a priority of his administration to grow Japan’s economy and eliminate deflation (falling
prices), which has plagued Japan for many years. His economic plan, nicknamed “Abenomics,”
relies on three major economic policies: expansionary monetary policies, fiscal stimulus, and
structural reforms. To promote expansionary monetary policy, Japan’s central bank (the Bank of

(...continued)
113th Cong., 1st sess., February 26, 2013.
51 For example, see Matthew Malinowski and Blake Schmidt, “Brazil Real Surges on $60 Billion Intervention Plan,”
Bloomberg, August 23, 2013.
52 G-20 Leaders’ Declaration, September 2013, St. Petersburg, http://www.g20.org/documents.
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Japan) unveiled a host of new measures in the first half of 2013, including goals to double the
monetary base (commercial bank reserves plus currency circulating in the public) and to double
its holdings of Japanese government bonds. By buying government bonds in exchange for yen,
the Bank of Japan can increase Japan’s money supply.
Changes in Japan’s monetary policies, along with fiscal stimulus measures, appear to be
contributing to a strengthening of Japan’s economy. For example, in July 2013, the IMF upgraded
its forecast of growth in Japan for 2013, from 1.5% to 2.0%.53 However, the expansionary
monetary policies may have also contributed to a relatively sharp depreciation of the yen, which
fell more than 25% between mid-2012 and mid-2013 (see Figure 5), even as Japan has not
directly intervened in currency markets since 2011.
Several countries have expressed their concerns about a weakening of the yen. An official from
the Russian central bank reportedly warned that “Japan is weakening the yen and other countries
may follow,” and that “the world is on the brink of a fresh currency war.”54 Additionally, the
president of China’s sovereign wealth fund reportedly warned Japan against using its neighbors as
a “garbage bin” by deliberately devaluing the yen, and South Korea’s finance minister argued that
Japan’s weakening yen hurts his country’s economy more than threats from North Korea.55
Movements in Japan’s currency have also created concerns for some Members of Congress, with
concerns being raised about the currency policies in the context of the TPP, where Japan is one of
the negotiating parties.
Others argue that a weakening yen in recent months has partially offset the slow, but continued,
appreciation of the yen in the preceding several years (Figure 5). For example, in January 2012,
the IMF estimated that the Japanese yen was “moderately overvalued from a medium-term
perspective.”56 Some also argue that, rather than targeting the value of the currency, Japan’s
monetary policies are targeting domestic objectives, namely, beating deflation that has plagued
the economy for many years. Japan’s finance minister, Taro Aso, reportedly stated that “monetary
easing is aimed at pulling Japan out of deflation quickly. It is not accurate at all to criticize (us)
for manipulating currencies.”57


53 IMF, World Economic Outlook Update, July 9, 2013, http://www.imf.org/external/pubs/ft/weo/2013/update/02/.
54 Simon Kennedy and Scott Rose, “Russia Says World is Nearing Currency War as Europe Joins,” Bloomberg,
January 16, 2013.
55 Lingling Wei, “China Fund Warns Japan Against a ‘Currency War,’” Wall Street Journal, March 6, 2013; Cynthia
Kim, “South Korea’s Hyun Says Yen Bigger Issue than North Korea,” Bloomberg, April 18, 2013.
56 IMF, “Japan: Solid Recovery, but Europe Dampens Outlook,” IMF Survey Online, June 12, 2012,
http://www.imf.org/external/pubs/ft/survey/so/2012/car061112b.htm.
57 “Japan Denies Currency Manipulation Claims Ahead of G20,” Reuters, January 25, 2013.
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Figure 5. U.S. Dollar-Japanese Yen Exchange Rate

Source: Federal Reserve.
Note: A decrease represents a depreciation of the yen relative to the U.S. dol ar.
Debates
There is debate over whether the expansionary monetary policies, including quantitative easing,
implemented by some developed economies have been “beggar-thy-neighbor” policies. Some
argue that expansionary monetary policies have unfairly caused the currencies of developed
countries to depreciate against other countries, giving the exports of developed countries an
“unfair” export boost. However, most economists agree that the expansionary policies in the
United States, the UK, the Eurozone, and Japan have been designed to stimulate their domestic
economies and will, in the medium term, cause prices to rise. As a result, they argue that there
will be little effect on the real exchange rate (the exchange rate adjusted for differences in prices
across countries) in the medium term (as prices increase), even if the nominal exchange rate (the
exchange rate not adjusted for differences in prices across countries) falls in the short term.
However, it should be noted that inflation in all these countries remains very low, to date.
Additionally, some argue that the expansionary policies stimulate domestic consumption and
investment, which ordinarily leads to higher, not lower, imports from other countries, all else
being equal.58 They argue that the net effect of quantitative easing and similar policies on trading
partners is not necessarily negative and could be positive in some instances. For example, the
IMF estimated that the first round of quantitative easing in the United States resulted in
substantial output gains for the rest of the world, and that the second round generated modest
output gains for the rest of the world.59
For some economists, then, a key question to evaluate whether expansionary monetary policies
are “fair” or “unfair” in the context of claims about “currency wars” is:

58 “Positive-Sum Currency Wars,” Economist, February 14, 2013.
59 IMF, “The United States Spillover Report – 2011 Article IV Consultation,” IMF Country Report No. 11/203, July
2011, pp. 32, http://www.imf.org/external/pubs/ft/scr/2011/cr11203.pdf.
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Is it appropriate for countries to adopt expansionary monetary policies to
combat a domestic economic recession, even if some sectors in other
countries may be adversely affected in the short run?:
Some economists argue
that it is entirely “natural” for countries to unilaterally adopt the monetary
policies to suit their specific needs of the domestic economy, and that countries
should use expansionary monetary policies to respond to economic recessions.60
Moreover, most central banks, including the Fed, are pursuing statutory mandates
that do not include foreign exchange rate requirements and responsibilities. Other
economists argue that countries have a number of policy tools to respond to
economic recessions, not just monetary policy, and that in today’s globalized
economy, a country should consider the potential negative spillover effects on
other countries in its decision-making process.
Addressing Disagreements over Exchange Rates
Government policies that impact exchange rates have been a source of contention among
countries. Various avenues have been developed or explored over the years to address specific
currency disputes, both at the multilateral level and through U.S. law, with varying degrees of
impact.
On the multilateral front, countries have made commitments to refrain from “manipulating” their
exchange rates to gain an unfair trade advantage through the International Monetary Fund (IMF).
Additionally, some argue that commitments made in the context of the World Trade Organization
(WTO) are relevant to disagreements over exchange rates, although this view is disputed.
Exchange rate issues have also been addressed in the past through less formal channels of
international economic coordination among small groups of developed economies.
In addition to these multilateral forums, the United States has also adopted legislation to address
unfair exchange rate policies pursued by other countries. In 1988, Congress enacted legislation to
address “currency manipulation” by other countries. Congress has also included provisions on
exchange rates in previous TPA legislation.
Exchange rate issues have been a key source of discussion at recent G-7 and G-20 meetings, but
little formal or concrete action has occurred beyond these discussions.61 Neither the IMF nor the
U.S. Treasury Department has found any country to be manipulating its exchange rate in recent
years.

60 For example, see Jeffrey Frankel, “Dispatches from the Currency Wars,” Project Syndicate, June 11, 2013.
http://www.project-syndicate.org/blog/dispatches-from-the-currency-wars.
61 The Group of 7 (G-7) includes Canada, France, Germany, Italy, Japan, the United States, and the United Kingdom.
The Group of 20 (G-20) includes the G-7 countries plus Argentina, Australia, Brazil, Canada, China, India, Indonesia,
Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, and the European Union (EU). For more on the G-
20, see CRS Report R40977, The G-20 and International Economic Cooperation: Background and Implications for
Congress
, by Rebecca M. Nelson.
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Forums to Potentially Address Disagreements
International Monetary Fund
With a nearly universal membership of 188 countries, the IMF is focused on promoting
international monetary stability.62 The IMF has engaged on the exchange rate policies of its
member countries as part of its mandate, arguably motivated by the experience of competitive
devaluations in the 1930s.63 Its role on exchange rates has evolved over time.64 Currently, IMF
member countries have agreed to several obligations on exchange rates in the IMF’s Articles of
Agreement, the document that lays out the rules governing the IMF and establishes a “code of
conduct” for IMF member countries.65 The Articles state that countries can use whatever
exchange rate system they wish—fixed or floating—so long as they follow certain guidelines;
that countries should seek, in their foreign exchange and monetary policies, to promote orderly
economic growth and financial stability; and that the IMF should engage in “firm” surveillance
over the exchange rate policies of its members.66
The Articles also state that IMF member countries are to “avoid manipulating exchange rates or
the international monetary system in order to prevent effective balance of payments adjustment or
to gain an unfair advantage over other members.”67 An IMF Decision, issued in 1977 and updated
in 2007 and 2012, provides further guidance that, among other things, “a member will only be
considered to be manipulating exchange rates in order to gain an unfair competitive advantage
over other members if the Fund determines both that: (a) the member is engaged in these policies
for the purposes of securing fundamental exchange rate misalignment in the form of an
undervalued exchange rate; and (b) the purpose of securing such misalignment is to increase net
exports.”68

62 For more on the IMF, CRS Report R42019, International Monetary Fund: Background and Issues for Congress, by
Martin A. Weiss.
63 For example, see Morris Goldstein, “Currency Manipulation and Enforcing the Rules of the International Monetary
System,” in Reforming the IMF for the 21st Century, ed. Edwin M. Truman, Special Report 19 ed. (Institute for
International Economics, 2006), http://www.piie.com/publications/chapters_preview/3870/05iie3870.pdf.
64 Between the end of World War II and the early 1970s, the IMF supervised a fixed exchange rate system, in which the
value of all currencies was fixed to the U.S. dollar, and the value of the dollar was fixed to gold. Countries could not
change their exchange rates by more than 10% without the Fund's consent, and could only do so to correct a
“fundamental disequilibrium” in exchange rate values. This system broke down in the early 1970s when the United
States floated its currency, and some other countries subsequently decided to float their currencies as well. After a
period of turmoil in world currency markets, an amendment to the IMF’s founding document—the Articles of
Agreement—was adopted in 1978. This Amendment laid out member countries’ obligations on exchange rate policies
to incorporate the shift to floating currencies adopted by some IMF member countries.
65 IMF Articles of Agreement (as amended), http://www.imf.org/External/Pubs/FT/AA/#art4.
66 IMF Article IV.
67 Effective balance of payments adjustment generally refers to a country’s ability to, over time, balance its
international transactions, particularly relating to the capital account (financial transactions) and its current account
(export and import of goods and services, plus income and other unilateral transfers, such as gifts or remittances).
68 IMF, “IMF Executive Board Adopts New Decision on Bilateral Surveillance over Members’ Policies,” Public
Information Notice (PIN) No. 07/69, June 21, 2007, http://www.imf.org/external/np/sec/pn/2007/pn0769.htm; IMF,
“IMF Executive Board Adopts New Decision on Bilateral and Multilateral Surveillance,” Public Information Notice
(PIN) No. 12/89, July 30, 2012, http://www.imf.org/external/np/sec/pn/2012/pn1289.htm.
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If a member country were to be found to be in violation of its obligations to the IMF, under the
rules laid out in the Articles, it could be punished through restrictions on its access to IMF
funding, suspension of its voting rights at the IMF, or, ultimately, expulsion from the IMF.69
To date, the IMF has never publicly labeled a member country a currency manipulator.70 Some
argue that the IMF’s definition of currency “manipulation” has made it tough to go after currency
“manipulators.” They argue that it requires the IMF to determine or demonstrate that policies
shaping the exchange rate level have been for the express purpose of increasing net exports, and
that “intent” is hard to establish.71 Even if the IMF could demonstrate a country is manipulating
its exchange rate under its definition of the term, some analysts also argue that, in practice, the
IMF does not have a credible mechanism for dealing with “manipulators,” particularly countries
that are not reliant on IMF financing.72 They argue that it is extremely unlikely the IMF would
actually strip violators of their IMF voting rights or expel them from the institution.
World Trade Organization
With 159 member countries, the WTO is the principal international organization governing world
trade. It was established in 1995 as a successor institution to the General Agreement on Tariffs
and Trade (GATT), a post-World War II institution intended to liberalize and promote
nondiscrimination in trade among countries. Unique among the major international trade and
finance organizations, the WTO has a mechanism for enforcing its rules through a dispute
settlement process.
Given the relationship between exchange rates and trade, some have argued that the World Trade
Organization (WTO) has a role to play in responding to currency disputes. Some analysts and
lawyers have examined whether WTO provisions allow for recourse against countries that are
unfairly undervaluing its currency.73
One aspect of the debate is whether WTO agreement on export subsidies applies to countries with
undervalued currencies. The WTO Agreement on Subsidies and Countervailing Measures
specifies that countries may not provide subsidies to help promote their national exports, and
countries are entitled to levy countervailing duties on imported products that receive subsidies
from their national government.74 Some economists maintain that an undervalued currency lowers
a firm’s cost of production relative to world prices and therefore helps encourage exports. Some
argue, then, that an undervalued currency should count as an export subsidy. It is not clear,
however, whether intentional undervaluation of a country's currency is an export subsidy under

69 IMF Articles of Agreement, Article XXVI:2.
70 Joseph E. Gagnon, “Combating Widespread Currency Manipulation,” Peterson Institute for International Economics
Policy Brief PB12-19, July 2012, http://www.iie.com/publications/pb/pb12-19.pdf.
71 Claus D. Zimmermann, “Exchange Rate Misalignment and International Law,” The American Journal of
International Law
, vol. 105, no. 3 (July 2011), pp. 423-476.
72 Ibid.
73 For example, see Robert W. Staiger and Alan O. Sykes, "'Currency Manipulation' and World Trade," World Trade
Review
, vol. 9, no. 4 (2010), pp. 583-627; Haneul Jung, “Tackling Currency Manipulation with International Law: Why
and How Currency Manipulation Should be Adjudicated?,” Manchester Journal of International Economic Law, vol. 9,
no. 2 (2012), pp. 184-200.
74 WTO Agreement on Subsidies and Countervailing Measures, http://www.wto.org/english/docs_e/legal_e/24-
scm.pdf.
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the WTO's specific definition of the term, and thus is eligible for recourse through countervailing
duties under WTO agreements. For example, the subsidy must be, among other things, specific to
an industry and not provided generally to all producers. There is debate over whether intentional
undervaluation of a currency is “industry specific” because it applies to everyone.
Another aspect of the debate relates to a provision in the GATT (the WTO agreement on
international trade in goods), which states that member countries “shall not, by exchange action,
frustrate intent of the provisions” of the agreement.75 Some analysts argue that policies to
undervalue a currency are protectionist policies, and thus should count as an exchange rate action
that frustrates the intent of the GATT. Others argue that the language is too vague to apply to
undervalued currencies.76 Specifically, they argue that the language was written to apply to an
international system of exchange rates that no longer exists (the system of fixed exchange rates,
combined with capital controls, that prevailed from the end of World War II to the early 1970s).
No dispute over exchange rates has been brought before the WTO,77 and whether currency
disputes fall under the WTO's jurisdiction remains a contested issue.78
Less Formal Multilateral Coordination: The G-7 and the G-20
In addition to formal international institutions focused on economic issues, like the IMF and the
WTO, countries also use less formal forums to coordinate economic policies. Before the global
financial crisis of 2008-2009, the primary forum was a small group of seven advanced economies,
the G-7.79 Following the crisis, the G-20, a larger group of advanced and emerging-market
countries, became the premier forum for international economic coordination.80
In the past, small groups of advanced economies had had more success in addressing currency
issues through this type of less formal international cooperation. For example, in 1985, France,
West Germany, Japan, the United States, and the UK signed the Plaza Accord, in which countries
agreed to intervene in currency markets to depreciate the U.S. dollar in relation to the Japanese
yen and the German deutsche mark to address the U.S. trade deficit. In 1987, six countries (the
five signatories of the Plaza Accord, plus Canada) signed the Louvre Accord, in which they

75 GATT Article XV(4), http://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htm#articleXV.
76 For example, see Aaditya Mattoo and Arvind Subramanian, “Currency Undervaluation and Sovereign Wealth Funds:
A New Role for the World Trade Organization,” Peterson Institute for International Economics Working Paper WP 08-
2, January 2008, http://www.petersoninstitute.org/publications/wp/wp08-2.pdf; Gary Hufbauer, Yee Wong, and Ketki
Sheth, US-China Trade Disputes: Rising Tide, Rising Stakes. Policy Analyses in International Economics 78.
Washington: Institute for International Economics, 2006; Michael Waibel, “Retaliating Against Exchange-Rate
Manipulation under WTO Rules,” VoxEU, April 16, 2010, http://www.voxeu.org/article/retaliating-against-exchange-
rate-manipulation-under-wto-rules.
77 Robert E. Scott, “Currency Manipulation—History Shows that Sanctions are Needed,” Economic Policy Institute,
April 29, 2010, http://www.epi.org/publication/pm164/.
78 Gregory Hudson, Pedro Bento de Faria, and Tobias Peyerl, “The Legality of Exchange Rate Undervaluation Under
WTO Law,” Geneva Graduate Institute, Center for Trade and Economic Integration Working Paper, July 2011,
http://graduateinstitute.ch/webdav/site/ctei/shared/CTEI/working_papers/CTEI-2011-07.pdf.
79 The Group of 7 (G-7) includes Canada, France, Germany, Italy, Japan, the United States, and the United Kingdom.
80 The Group of 20 (G-20) includes the G-7 countries plus Argentina, Australia, Brazil, Canada, China, India,
Indonesia, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, and the European Union (EU). For more
on the G-20, see CRS Report R40977, The G-20 and International Economic Cooperation: Background and
Implications for Congress
, by Rebecca M. Nelson.
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agreed to halt the depreciation of the U.S. dollar through a host of different policy measures,
including taxes, public spending, and interest rates. Some economists argue that the Plaza and
Louvre Accords were successful because they reinforced economic fundamentals that were
pushing exchange rates in the desired direction.
Additionally, small groups of countries have executed coordinated interventions in foreign
exchange markets to shape the relative value of currencies. For example, the G-7 countries have
coordinated interventions a number of times: in 1995, to halt the dollar’s fall against the yen; in
2000, to support the value of the euro after its introduction; and in 2011, to stem appreciation of
the yen following a major crisis in Japan.81 This coordination has occurred on an ad hoc,
voluntary basis. It is not based on any specific set of rules or commitments on exchange rates, and
has been limited to a small group of advanced economies.
U.S. Law: The 1988 Trade Act
In 1988, Congress enacted the “Exchange Rates and International Economic Policy Coordination
Act of 1988” as part of the Omnibus Trade and Competitiveness Act of 1988 (the 1988 Trade
Act),82 when many policy makers were concerned about the appreciation of the U.S. dollar and
large U.S. trade deficits.83 A key component of this act requires the Treasury Department to
analyze on an annual basis the exchange rate policies of foreign countries, in consultation with
the IMF, and “consider whether countries manipulate the rate of exchange between their currency
and the United States dollar for purposes of preventing effective balance of payments adjustments
or gaining unfair competitive advantage in international trade.” If “manipulation” is occurring
with respect to countries that have (1) global currency account surpluses and (2) significant
bilateral trade surpluses with the United States, the Secretary of the Treasury is to initiate
negotiations, through the IMF or bilaterally, to ensure adjustment in the exchange rate and
eliminate the “unfair” trade advantage. The Secretary of the Treasury is not required to start
negotiations in cases where they would have a serious detrimental impact on vital U.S. economic
and security interests.
Additionally, the act requires the Treasury Secretary to submit a report annually to the Senate and
House Banking Committees, on or before October 15, with written six-month updates (on April
15), and the Secretary is expected to testify on the reports as requested.84 The reports are to
address a host of issues related to exchange rate policies, such as currency market developments;
currency interventions undertaken to adjust the exchange rate of the dollar; the impact of the
exchange rate on U.S. competitiveness; and the outcomes of Treasury negotiations on currency
issues, among others.
Since the 1988 Trade Act was enacted, the Treasury Department has identified three countries as
manipulating their currencies under the Trade Act’s terms: China, Taiwan, and South Korea.85

81 “Divine Intervention,” Economist, March 27, 2008.
82 P.L. 100-418; 22 U.S.C. 5301-5306.
83 C. Randall Henning, “Congress, Treasury, and the Accountability of Exchange Rate Policy: How the 1988 Trade Act
Should be Reformed,” Institute for International Economics Working Paper 07-8, September 2007,
http://www.iie.com/publications/wp/wp07-8.pdf.
84 The Treasury Department also posts the currency reports on its website: http://www.treasury.gov/resource-
center/international/exchange-rate-policies/Pages/index.aspx.
85 Treasury cited Taiwan and South Korea in 1988 and China in 1992. Taiwan’s and South Korea’s citations lasted for
(continued...)
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These designations occurred in the late 1980s and early 1990s; Treasury has not found currency
manipulation under the terms of the 1988 Trade Act since it last cited China in 1994. Some
Members of Congress have been concerned by what they perceive as inaction by the Treasury
Department on currency manipulation. In 2004, Congress passed legislation asking the Treasury
Secretary to submit a report “describing how statutory provisions addressing currency
manipulation by America’s trading partners ... can be better clarified administratively to provide
for improved and more predictable evaluation, and to enable the problem of currency
manipulation to be better understood by the American people.”86 In 2005, the Government
Accountability Office (GAO) completed a study on Treasury’s assessments of whether countries
manipulate their currencies for trade advantage.87 One conclusion in the report was that “Treasury
has generally complied with the reporting requirements for its exchange rate reports, although its
discussion of U.S. economic impacts has become less specific over time.”
Trade Promotion Authority and Trade Agreements
Given the potential links between exchange rate policies of other countries and the
competitiveness of U.S. industry and exports, Congress has referenced addressing currency issues
in previous TPA authorizations. For example, in the Omnibus Trade and Competitiveness Act of
1988, which granted “fast track” authority (the precursor to TPA) to the President, the President
was required, among other things, to submit a report to Congress with supporting information
after entering a trade agreement. One part of this report was “describing the efforts made by the
President to obtain international exchange rate equilibrium.”88
Additionally, when TPA was last renewed in 2002, Congress included exchange rate issues as a
priority that the Administration should promote. The legislation stipulated that the Administration
should “seek to establish consultative mechanisms among parties to trade agreements to examine
the trade consequences of significant and unanticipated currency movements and to scrutinize
whether a foreign government engaged in a pattern of manipulating its currency to promote a
competitive advantage in international trade.”89
A number of free trade agreements (FTAs) were negotiated under the 2002 version of TPA, with
Congress approving implementing legislation for FTAs with Chile, Singapore, Australia,
Morocco, the Dominican Republic and the Central American countries (CAFTA-DR), Bahrain,
Oman, Peru, Colombia, Panama, and South Korea. It is not clear to what extent currency issues
were salient issues in the negotiations or in the final agreements.

(...continued)
at least two 6-month reporting periods, while China’s lasted for five 6-month reporting periods. Taiwan was cited again
in 1992. U.S. Government Accountability Office, Treasury Assessments Have Not Found Currency Manipulation, but
Concerns about Exchange Rates Continue
, GAO-05-351, April 2005, http://www.gao.gov/assets/250/246061.pdf.
86 Section 221 of the Consolidated Appropriations Act, 2005 (P.L. 108-447).
87 U.S. Government Accountability Office, Treasury Assessments Have Not Found Currency Manipulation, but
Concerns about Exchange Rates Continue
, GAO-05-351, April 2005, http://www.gao.gov/assets/250/246061.pdf.
88 Section 1103(a)(2)(B)(iii) of the Omnibus Trade and Competitiveness Act of 1988 (P.L. 100-418).
89 Section 2102(c)(12) of the Trade Act of 2002 (P.L. 107-210).
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Responses to Current Disagreements
To the extent that there has been a formal multilateral response to current disagreements over
exchange rates, it has been through discussions at G-7 and G-20 meetings. During meetings in
February 2013, for example, the G-7 nations reaffirmed their “long-standing commitment to
market-determined exchange rates” and to “not target exchange rates.”90 The G-20 countries
pledged to “refrain from competitive devaluation” in February 2013,91 and more recently in
September 2013, that central banks “have committed that future changes to monetary policy
settings will continue to be carefully calibrated and clearly communicated.”92 G-7 and G-20
commitments are non-binding, although other enforcement mechanisms, including peer pressure,
have been used to ensure compliance in the past.
Current disagreements over exchange rates have not resulted in the IMF or the Treasury
Department labeling any countries as currency manipulators, and no country has filed a dispute
over exchange rate policies at the WTO. Starting in 2011, Brazil did present three papers on
exchange rates and the role of the WTO for discussion at the WTO Working Group on Trade,
Debt, and Finance. Reportedly, many other WTO members have approached the discussions with
“reserve and skepticism” and believed that the IMF would be the appropriate forum for such a
discussion.93
Some analysts and policy makers have been concerned that current disagreements have not
resulted in more formal action, particularly by the IMF and the Treasury Department, which have
the clearest rules pertaining to currency manipulation. They argue that currency manipulation has
occurred, but the current frameworks are ineffective at dealing with it. For example, they argue
that it is hard to demonstrate that exchange rate policies have been for the express purpose of
increasing net exports; the IMF does not have a clear enforcement mechanism for its rules on
exchange rates; and the Treasury Department fears retaliation from countries it unilaterally labels
as “manipulators.” One policy expert has stated that the greatest flaw in the international financial
architecture is its failure to effectively counter and deter competitive currency policies.94
Other analysts and policy makers contend that the current frameworks on “currency
manipulation” are effective. They argue that formal action by the IMF and the Treasury
Department has not occurred because countries have not engaged in policies that violate
international commitments on exchange rates or triggered U.S. laws pertaining to currency
manipulation. Some analysts also believe that the Treasury Department has at various times urged

90 Bank of England; News Release – G7 Statement, February 12, 2013,
http://www.bankofengland.co.uk/publications/Pages/news/2013/027.aspx.
91 Charles Clover, Robin Harding, and Alice Ross, “G20 Agrees to Avoid Currency Wars,” Financial Times, February
17, 2013; G-20 Communiqué, Meeting of Finance Ministers and Central Bank Governors, Moscow, February 15-16,
2013, available at http://www.g20.org/documents/.
92 G-20 Leaders’ Declaration, September 2013, St. Petersburg, http://www.g20.org/documents.
93 Vera Thorstensen, Daniel Ramos, and Caronlina Muller, "The 'Missing Link' Between the WTO and IMF," Journal
of International Economic Law
, vol. 16, no. 2 (2013), pp. 353-381.
94 Fred Bergsten, “Currency Wars, the Economy of the United States, and Reform of the International Monetary
System,” Remarks at Peterson Institute for International Economics, May 16, 2013,
http://www.iie.com/publications/papers/bergsten201305.pdf.
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countries to address exchange rate issues behind-the-scenes, even if it has not publicly labeled
any countries as currency manipulators in recent years.95
Policy Options for Congress
Some Members of Congress have proposed taking action on currency issues, because they are
concerned about the impact of other countries’ exchange rate policies on the competitiveness of
U.S. exports and import-competing firms. Some Members could also be concerned that other
countries have accused the United States of engaging in “currency wars.” If Members did decide
to take action on exchange rates, there are a number of options for doing so, some of which
Members are already pursuing. Policy options could include, among others:
(1) Maintaining the status quo: Even though Members may be concerned about supporting U.S.
exports and jobs from “unfair” exchange rate policies adopted by other countries, there may be a
number of reasons to refrain from taking action on exchange rate disputes:
• There is much debate among economists on how to calculate a currency’s
“equilibrium” or “fundamental” long-term value, making the classification of
currencies as undervalued or overvalued complex and subject to much
discussion, with different models at times yielding very different results. Some
economists also believe that currency interventions have limited, short-term
effects, particularly on floating currencies, given the high volumes of capital
flows.
• U.S. imports from trading partners with weak currencies are less expensive than
they would be otherwise. Lower-cost imports may benefit U.S. businesses that
purchase inputs from abroad and U.S. consumers.
• Unilaterally labeling a country as a currency manipulator or leading a multilateral
charge against currency manipulation could trigger retaliation by other countries.
For example, the United States has a low savings rate and benefits from low
interest rates. Countries labeled as currency “manipulators” could buy fewer U.S.
government bonds, making it more expensive and potentially harder for the U.S.
government to finance its budget deficit.
• Tensions over exchange rates could dissipate as the global economy strengthens,
particularly if developed economies end quantitative easing. For example,
Brazil’s concerns about the real appreciating against the U.S. dollar have
reversed in recent months (and now Brazil is concerned about the real
depreciating against the U.S. dollar too much).
(2) Urging the Administration to address currency disputes at the IMF or WTO: Addressing
currency disputes in formal international institutions may provide broad, multilateral support for
decisions that are reached. The IMF and the WTO have been the international institutions
identified as best suited for dealing with exchange rate disputes, because the IMF has the clearest
set of commitments relating to currency manipulation, and the WTO is unique among
international financial institutions in that it has a clear enforcement mechanism. However,

95 For example, see Annie Lowrey, “A Tightrope on China’s Currency,” New York Times, October 22, 2012.
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addressing disputes over exchange rates at the IMF and WTO may run into obstacles. For
example, the IMF Executive Board may find it too politically sensitive to label a country as a
“currency manipulator.” Congress could ask the Administration to push for changes to IMF
and/or WTO rules to allow currency disputes to be addressed more clearly under these
organizations, but this could be a complicated process that requires multilateral consensus.
(3) Urging the Administration to strengthen informal international cooperation on exchange
rates:
For example, Congress could urge the Treasury Department to continue its push for G-20
commitments on (1) greater transparency of foreign reserve data and currency intervention
operations; and (2) avoidance of official public statements intended to influence exchange rate
levels.96 Additionally, Congress could also urge the Administration to push for informal
agreements to re-align the value of currencies, similar to the Plaza Accord and the Louvre Accord
in the 1980s. However, some question whether informal cooperation can effectively foster
cooperation on exchange rates consistently, not just on an as-needed or ad-hoc basis. The G-7
excludes large emerging market economies that are major players in the global economy, but, at
the same time, the G-20 may be too large and heterogeneous to reach meaningful agreements.
Also, since agreements reached at the G-7 and G-20 are non-binding, questions have been raised
about the effectiveness of these forums. This approach would also be unlikely to address
manipulation by countries outside the G-7 or G-20, although some argue that G-20 action in
particular would involve the major economies in the international economy.
(4) Addressing currency issues in trade agreements or as a negotiating objective in TPA:
Congress could address concerns about the exchange rate policies of other countries by urging the
Administration to address currency issues in the free trade agreements currently under
negotiation, including the TPP and TTIP. For example, Representative Levin released a proposal
to address currency manipulation in the TPP in July 2013.97 With regards to any legislation
renewing TPA, Congress could also identify currency issues as a trade policy priority, similar to
the provisions included in the 2002 TPA legislation, or include currency issues as a more formal
trade negotiating objective.
Seeking to include currency issues in a trade agreement could make the agreement more difficult
to conclude. There are also different views about how currency issues could or should be
addressed. Some have called for enforceable provisions, but there may be disagreement over how
exchange rate disputes would be adjudicated. Others have called for cooperative frameworks to
examine currency issues. Additionally, any negotiated agreement on currency disagreements
would be limited in scope, because it would apply to negotiating parties to the agreement and not
to countries in the global economy more broadly.
(5) Passing new legislation on undervalued exchange rates or amending existing legislation
on currency manipulation:
Some argue that legislation could directly address the concerns of

96 U.S. Department of the Treasury, Office of International Affairs, “Report to Congress on International Economic and
Exchange Rate Policies,” April 12, 2013, http://www.treasury.gov/resource-center/international/exchange-rate-
policies/Documents/Foreign%20Exchange%20Report%20April%202013.pdf.
97 U.S. Representative Sander Levin, “U.S.-Japan Automotive Trade: Proposal to Level the Playing Field,”
http://www.piie.com/publications/papers/levin20130723proposal.pdf. The proposal calls for, among other
things, a commitment by TPP countries to avoid manipulating exchange rates to gain an unfair competitive
advantage over other TPP countries; establishing specific benchmarks by which to determine whether a TPP
country has manipulated its exchange rate; and enforcing commitments to avoid exchange rate manipulation
through the normal dispute settlement mechanism of the TPP agreement.
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certain U.S. exporters and import-sensitive producers about “unfair” exchange rate policies of
other countries, and could provide U.S. exporters with recourse and/or encourage other countries
to push up the value of their currencies. Additionally, a possible advantage of legislation relating
to countries with “undervalued” or “misaligned” currencies is that it could apply to all countries,
not just a subset of countries, such as countries that are party to a trade negotiation with the
United States.
Several pieces of legislation on exchange rates have been introduced in previous Congresses, and
two bills have been introduced in the 113th Congress:
The Currency Reform for Fair Trade Act (H.R. 1276) would affect the
treatment of imports from countries with fundamentally undervalued exchange
rates. If passed, it would broaden the definition of a “countervailable” subsidy (or
a subsidy that could be eligible to be offset through higher import duties) to
include the benefit conferred on merchandise imports into the United States from
foreign countries with fundamentally undervalued currencies.98
The Currency Exchange Rate Oversight Reform Act of 2013 (S. 1114)
proposes methods for addressing exchange rate issues. Among other provisions,
the legislation prescribes negotiations and consultations with countries with
fundamentally misaligned exchange rates, and actions to take against “priority
action” countries that have failed, or persistently failed, to take action to
eliminate exchange rate misalignments.99
Others argue that it could be difficult to reach consensus on if, and if so, by how much, a currency
is undervalued or misaligned. Additionally, if currency “manipulation” was defined in statute, it
could be inflexible. As mentioned earlier, unilateral legislation could also provoke countries that
are labeled as having undervalued currencies, and cause them to retaliate in ways that undermine
other U.S. interests. Legislation could also harm U.S. producers and consumers that buy and use
imported goods. Finally, some have raised questions about whether legislation relating to import
duties would violate WTO rules.

98 The bill provides details on how it would be determined if a country had a fundamentally undervalued currency, and
the size of the real effective exchange rate undervaluation. Introduced by Representative Levin, it is similar to bills
introduced by Representative Levin in the 112th Congress (H.R. 639) and in the 111th Congress (H.R. 2378). The
House passed H.R. 2378 in September 2010.
99 More generally, the bill requires the Treasury Department to issue a semiannual report to Congress on international
monetary policy and exchange rates; prescribes negotiations and consultations with countries with fundamentally
misaligned exchange rates, and actions to take against “priority action” countries that have failed, or persistently failed,
to take action to eliminate the fundamental exchange rate misalignment; requires the Treasury Secretary to oppose any
proposed changes in the international financial institutions that would increase the representation of countries with
fundamentally misaligned currencies that are designated for priority action; amends countervailing and antidumping
duty legislation to incorporate imports from countries with fundamentally misaligned currencies; and establishes an
Advisory Committee on International Exchange Rate Policy. It would also repeal the Exchange Rates and International
Economic Policy Coordination Act of 1988. Introduced by Senator Brown, this bill is similar to S. 1619, which Senator
Brown introduced in the 112th Congress and was passed by the Senate in October 2011.
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Conclusion
Exchange rates are important prices in the global economy, and changes in exchange rates have
potentially substantial implications for international trade and investment flows across countries.
Following the global financial crisis of 2008-2009, tensions among countries over exchange rate
policies have arguably broadened. Some policy makers and analysts have expressed concerns that
some governments are pursuing exchange rate policies to gain a trade advantage, as many
countries grapple with economic recession or slow growth and high unemployment following the
financial crisis. Concerns have focused on both government interventions in currency markets in
a number of other countries, including China and Switzerland, and expansionary monetary
policies in some developed economies. On the other hand, some economists argue that the effects
of exchange rate policies are nuanced, creating winners and losers, and that it is hard to make
generalized claims about the negative effects of “currency wars.”
Members concerned about the competitiveness of the United States may want to weigh the pros
and cons of taking action on exchange rate disputes. If policy makers do want to take action, a
number of policy options are available. Some Members of Congress have proposed legislation to
address currency undervaluation by other countries and proposed addressing currency issues in
on-going trade negotiations, particularly in the context of the proposed TPP and any renewal of
TPA. Members could also urge the Administration to press the issue more forcefully at
international institutions, such as the IMF or WTO, or more informal forums for international
cooperation, including the G-7 or the G-20.
To date, the most formal response to current tensions over exchange rates has been through
discussions at G-7 and G-20 meetings. Although frameworks have been set up for addressing
currency “manipulation” at the IMF and through U.S. law, neither the IMF nor the U.S. Treasury
Department has taken formal action on current disputes over exchange rates. There are debates
about why formal action has not been taken at these institutions. One general complicating factor
in addressing currency disputes is that estimating a currency’s “fundamental” or “true” value is
extremely complex and subject to debate among economists.

Author Contact Information
Rebecca M. Nelson
Analyst in International Trade and Finance
rnelson@crs.loc.gov, 7-6819

Acknowledgments
Hannah Fisher and Amber Wilhelm provided assistance with the figures for this report.
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