Key Takeaways
- Quantitative easing (QE) adds new money to the economy by purchasing securities.
- Currency manipulation seeks to alter currency value to boost exports or reduce debt interest.
- Some view QE’s effect on exchange rates as a form of currency manipulation.
- Central banks may weaken currencies through QE, affecting international trade dynamics.
- Determining true currency value and manipulation is complex and often debated.
Quantitative easing (QE) effectively adds new money to an economy by creating the funds used to purchase securities, which also helps stabilize markets. Currency manipulation is an effort to tinker with the value of a nation’s currency in foreign exchange rates, to boost exports through favorable exchange rates.
In addition to trying to stabilize markets, QE seeks to stimulate economic growth. In addition to trying to increase exports, currency manipulation aims to reduce a country’s debt interest burden.
Quantitative easing is typically employed after a recession, while currency manipulation is usually enacted when trade competitiveness is sought.
Both strategies affect the value of currencies differently, and not without controversy.
What is the difference between quantitative easing and currency manipulation? Keep reading to learn more, including examples from the 2007–2009 Great Recession amd the COVID-19 pandemic.
Quantitative Easing vs. Currency Manipulation: An Overview
In the wake of the 2007–2009 Great Recession, central banks around the world entered uncharted territory when they began quantitative easing, the long-term purchasing of securities such as U.S. Treasuries and mortgage-backed securities (MBS).
Quantitative easing pumps money into the financial system as central banks stave off a complete collapse of the banking system. The flood of cash lowers interest rates in the hope that growth returns.
In 2009, the U.S. Federal Reserve was the first central bank to begin purchasing securities. As interest rates fell, so did the U.S. dollar (USD). In the month preceding the announcement of QE1, the U.S. dollar index (DXY) fell 10 percent—its biggest monthly fall in over a decade. QE1 ended in 2010.
After the COVID-19 pandemic began in 2020, the combination of multiyear COVID lockdowns, supply chain disruptions, aberrations in the oil markets, a disconnect in real economically driven employment vs. the “Great Resignation,” and aggressive Fed tightening of monetary policy (quantitative tightening) created the illusion of an overheated economy in danger of growing too fast.
For more than a decade prior, however, economists’ greatest fear was that the Fed didn’t have enough tools to fend off a weakening economy. Having lowered interest rates to nearly zero, the last strategies to employ seemed to be currency manipulation or the relatively new concept of quantitative easing (QE).
The Federal Reserve opted in 2020 for another round of quantitative easing (QE4), which ended in 2022.
Understanding the Hype Around Currency Manipulation
As it turns out, currency manipulation is not that easy to identify. As one Wall Street Journal blog post put it, “Currency manipulation is not like pornography—you don’t know it when you think you see it.” Policy action that favorably affects a country’s exchange rate—making exports more competitive—is not in itself evidence of currency manipulation. You also have to prove that the value of the currency is being held artificially below its actual value. What’s the true value of a currency? That’s not easy to determine, either.
In general, countries prefer their currency to be weak because it makes them more competitive on the international trade front. A lower currency makes a country’s exports more attractive because they are cheaper on the international market. For example, a weak U.S. dollar makes U.S. car exports less expensive for offshore buyers. Secondly, a country can use a lower currency to shrink its trade deficit by boosting exports. Finally, a weaker currency alleviates pressure on a country’s sovereign debt obligations. After issuing offshore debt, a country will make payments, and as these payments are denominated in the offshore currency, a weak local currency effectively decreases these debt payments.
Countries around the world adopt different practices to keep the value of their currency low. The rate on the Chinese yuan is set each morning by the People’s Bank of China (PBOC). The central bank does not allow its currency to trade outside of a set band over the next 24 hours, which prevents it from any significant intraday declines.
A more direct form of currency manipulation is intervention. After the appreciation of the Swiss franc during the financial crisis, the Swiss National Bank purchased large sums of foreign currency, namely the USD and euros, and sold the franc. By moving its money lower through direct market intervention, it hoped Switzerland would increase its trade position within Europe.
Finally, some pundits have argued that another form of currency manipulation is quantitative easing.
How Quantitative Easing Works
Quantitative easing (QE), considered an unconventional monetary policy, is just an extension of the usual business of open market operations. Open market operations (OMOs) are the mechanism by which a central bank either expands or contracts the money supply by buying or selling government securities in the open market. The goal is to reach a specified target for short-term interest rates that will have an effect on all other interest rates within the economy.
Quantitative easing is meant to stimulate a sluggish economy when normal expansionary open market operations have failed. In an expanding market, the stock market rises, bringing investors in to buy shares of profitable companies.
With an economy in recession and interest rates at the zero-bound, the Federal Reserve conducted three rounds of quantitative easing, adding more than $3.5 trillion to its balance sheet by October 2014. Intended to stimulate the domestic economy, these stimulus measures had indirect effects on the exchange rate, putting downward pressure on the dollar.
Such pressure on the dollar wasn’t entirely negative in the eyes of U.S. policymakers, since it would make exports relatively cheaper—which is another way to help stimulate the economy. However, the move came with criticisms from policymakers in other countries that a weakened U.S. dollar was hurting their exports. Economists then began the debate: Is QE a form of currency manipulation?
While the Fed intentionally engaged in a monetary policy action that decreased the value of its currency, the intended effect was to lower domestic interest rates to encourage greater borrowing and, ultimately, more spending. The indirect impact of a deterioration of the exchange rate is just the consequence of having a flexible exchange rate regime.
What Is Quantitative Easing?
Quantitative easing (QE) is a form of monetary policy in which a central bank, like the U.S. Federal Reserve, purchases securities in the open market to reduce interest rates and increase the money supply. Quantitative easing creates new bank reserves, providing banks with more liquidity and encouraging lending and investment.
What Is Currency Manipulation?
Currency manipulation is an accusation often levied in trade or exchange rate disputes, notably by the United States against trading partners who are sometimes alleged to set the exchange rate of their currency against the U.S. dollar artificially low to boost exports. Governments and central banks can be accused of currency manipulation if they fix the exchange rate or seek to affect it less openly with market transactions from time to time.
What Is Monetary Policy?
Monetary policy is a set of tools used by a nation’s central bank to control the overall money supply, promote economic growth, and employ strategies such as revising interest rates and changing bank reserve requirements. In the U.S., the Federal Reserve implements monetary policy through a dual mandate to achieve maximum employment while keeping inflation in check.
The Bottom Line
Currency manipulation and quantitative easing (QE) are not the same thing. The former tries to improve the value of a nation’s currency in foreign exchange rates to boost exports, while the latter is a monetary policy where a central bank buys securities in the open market to lower interest rates and raise the money supply.
Some argue that QE is a form of currency manipulation. The debate centers around intention (increasing the money supply) vs. consequence (weakening currencies).
