Currency Manipulation in its narrow definition is that a currency exchange rate is being manipulated up or down by a controller, typically implying the government authority. In reality, currency exchange rate fluctuates by trading force that is by every trader. It is fair to say that every trader, from common citizens, to investors, to corporations to banks and including governments, they all influence currency exchange or manipulate currencies (buy or save and sell or spend) to gain profit or to maximize their cash value or to protect assets. Taking advantage of currency fluctuation is practiced daily by everyone in his or her process of "managing cash flow". In a healthy economy, money should be circulated (flow) to produce economic effects, from hardcore manufacturing to soft-kill creation to produce 'goods', 'products', 'designs', 'arts', 'programs' and 'services'. When money does not flow, we will have a stagnant economy. In the world economy, multiple currencies are used as money to maintain or stimulate economy. Since each currency is managed to flow and exchange with other currencies, it is natural that each currency will maintain exchange values with other currencies depending on what currency holders (common folks, investors, corporations, banks and governments) are willing to accept the exchange rate. The exchange rates will fluctuate as holders change their value views on the currencies they hold and their desire to exchange.
Common folks manage their cash value and cash flow by buying goods and services at low prices (especially on imports produced by foreign currency), traveling to countries when currency exchange is to their favor and exchange money when the exchange rate is favorable to the currency they hold. Some might save money in certain currencies when banks offer higher interest rate for those currencies. Of course, investors have more money; they will do the same except they will do it more often, with larger quantities, dealing with more sophisticated financial instruments (valued in different currencies). When investors focus on their cash flow just for maximizing their cash value with no concern of maintaining or stimulating economy, their 'cash flow managements' often become currency manipulation to maximize cash value damaging certain targeted currencies. A typical method they use in speculating currency fluctuation is to hedge on a particular currency, for example, by borrowing a huge amount of, say Thai Baht, and expecting or manipulating (driving down) its value lower then purchasing Baht at lower value to repay the loan. This type of 'cash flow management' is only benefiting the speculating investor and not good for the economy. Unfortunately, there are many such speculators doing currency manipulation in the world.
Corporations must manage their cash flow to maximize the value of the currencies they hold especially if a multinational corporation has payrolls in many countries requiring large reserves in different currencies. Naturally, the treasurers of corporations must engage in currency exchange fluctuation and buy and sell different currencies. A legitimate international corporation would manage currency by paying attention to currency fluctuation but not trying to manipulate or speculate in currency exchange, which is a high risk business. A government has obligation to protect and manage the country's economy, naturally it must defend their currency against speculators with intention to make huge profit by exploiting the currency. To maintain competitive position in export, often the government must maintain a stable currency and adjust its exchange rate to be competitive in trade. This kind of currency adjustment is of temporary nature very different from currency manipulation by systemic schemes devised by currency manipulators (traders). There is no country that can survive on de-valuing her currency continuously (hyperinflation may result), since she must buy international goods with her currency and her citizens need to travel to other countries requiring currency exchange. An unstable devaluing currency is very vulnerable to currency speculators as well as manipulating investors who will buy up the country's hard assets such as real estate and factories at bottom prices when the local currency is pushed to bottom value.
The U.S. has been in a unique position regarding her currency, US dollar. The dollar has been used as the world standard exchange currency for nations to make trades and balance payments with each other. Ever since the U.S. abandoned the gold backing policy to use gold to back the value of the green dollar, the US dollar's value has been guaranteed by the U.S. government. So long the U.S. economy is healthy (a large rich trading partner), all trading countries with the U.S. will trust the credit of the U.S. government. Under that condition, the U.S. is free to print the U.S. dollars or issue US treasury bills unlimitedly to pay for her trade obligations and debt and loan money to investors to invest in foreign countries. After the US investment promoted economic growth in a country and pumped up investment gain, the U.S. then can increase her bank interest rate and adjust currency exchange rate for the dollar to attract or draw back capitals to the U.S. (through Wall Street) and let US investors cash out the profit made in that country. (Assets in that country will drop to bottom prices in the process) The accumulated earnings through hard work (trading) of that country are then wiped out rapidly by foreign investors.
The above process would work if the US economy could always go through an economic cycle, getting in and out of recession smoothly. However, in 2008, the U.S. economy went through a devastating recession triggered by a national housing bubble, the collapse of credit market for debt swap and a huge national debt. The recovery of that economy was not as quick and smooth as expected. The U.S. is continuously mounting debt (reaching $19 trillion) and her world number one economy position is being challenged by China. The US investors participated in the China boom. To induce the investors to cash out profit made in China and bring capitals back to the U.S., the US economy has to recover and the dollar interest rate has to be raised. Apparently China had recognized this scenario while managing a slowing down economy. China had to adjust currency exchange rate (devalue RMB) to discourage investors to cash out profit in RMB to convert back to US dollars in order to protect China's industries and assets and her economy. This is the basic conflict in currency battle between the U.S. and China for the past few years. Both the U.S. and China are currency manipulators for different purposes, one to loot profits and one to protect national assets. In addition, China had recognized her vulnerability of holding huge US debt in US treasury bills; thus, China had started to reduce her US treasury bills holdings and to use RMB instead of US dollar to settle trade balances with other countries. So long other countries would go along with using RMB; China would be safer and more capable in defending her currency.
Since China is a major trading partner with most countries, China is likely to succeed in using RMB for settling trade balances. China had no choice but to take protective measures in maintaining a stable RMB. The U.S. on the other hand had to make fundamental policy changes regarding her national finances, revitalizing her industries, and to get rid of her huge national debt instead of blaming or playing currency game; that is the only way to make her economy great again.
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