11.j Balance of Payments - impact to currency during trade deficits
Flow supply/demand mechanism. Current account deficits in a country increase the supply of that currency in the markets (as exporters to that country convert their revenues into their own local currency). This puts downward pressure on the exchange value of that currency.
I’m not sure I understand what they’re trying to say literally, nor the strategic takeaway. So let’s take USA vs China which has a trade deficit on the U.S. side. Is the book saying that:
1. Chinese manufacturers produce goods that sell in the USA for U.S. dollars, not Chinese Yuan.
2. Chinese people, once they capture the US dollars, convert that into Chinese Yuan.
3. This devalues the USD in the USD: Yuan exchange ratio because there is an abundance of USD and a shortage of Yuan?
Study together. Pass together.
Join the world's largest online community of CFA, CAIA and FRM candidates.