How does the balance of trade affect prices in exchange rates and foreign reserves held in other currencies?
The decrease in the trade surplus for China increased pressure on Chinese policy makers to appreciate the yuan, which has been pegged at 6.8 to the dollar.
How will the appreciation potentially affect the exchange rates of EU and US countries? Are Latin American countries affected in any way?
Assuming that the policy makers might need to assess the foreign reserves in, say, USD (right?), in order to maintain the funds available for expected imports, how is this expected to affect the world’s economy?
Source: http://www.timesofmalta.com/articles/view/20100410/business/speculation-mounts-over-chinas-currency-move
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about 1 year ago
China’s artificially lower currency allows them to produce their goods at a cheaper rate relative to the rest of the world… As the dollar falls in value, the yuan does as well even if it should be strenghtening.
The reason they can do that is because they have a trade surplus… This gives them an inflow of US dollars so they always swap dollars for yuan. When a central bank runs out of a currency and it is pegged too low or too high, the value of the currency drops instantly to the actual rate. See the Mexican debt crisis of the early 90′s.
It will change the world’s economy by increasing the price of China’s goods as well as making other countries goods cheaper. Since the all majors countries other than China have floating exchange rates, the central banks aren’t involved in the currency exchange (In terms of directly swapping dollars for yuan) and the only impact they can have is changing the interest rate or some form of creating money.