- Most countries like to keep their Forex Reserves in the form of Dollars
- All currencies in the world are equated against the Dollar for it’s value in the market
- Dollar circulation is entirely managed by an Independent central Bank – Federal Reserve (Fed) in the US of A.
- More the Dollars in a country = the local currency ‘appreciates’
- The more the local currency appreciates the more expensive it’s exports become [imports become cheaper]
- More expensive the exports the less competitive the Country gets in International trade scene
- Lesser the Dollars in a country than local currency = the local currency ‘depreciates’
- The more the local currency depreciates the more expensive the imports become [exports become competitive]
- More expensive the imports the more expensive the Cost of living becomes in the domestic scene
- More money in circulation also causes domestic inflation
China, the emerging super power and an export oriented developing economy, probably understood this much earlier than others and ensured that their RMB or Chinese Yuan remains rock steady in value verses the Dollar. They tried to keep the value of their currency decoupled from Dollar, so they could continually remain competitive in International Trade and at the same time control prices locally and fuel domestic growth. Ofcourse all of this came at the expense of being called a “Currency Manipulator”, however their objective was met. Other countries with lesser clout than China – do suffer the consequences of Dollar supply. China also has been the most vocal in asking for the International Trade to be done in a neutral currency [Ex: using the SDR of IMF] so the world trade is decoupled from Dollar whose circulation is dictated by Fed entirely based on the domestic requirement in the USA.