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BobBobson

Why Countries Choose To Invest 'toxic' Dollar Assets Instead Of Converting Dollars To Own Currencies

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EDIT (Sorry, should have been a ? in title)

From what I understand, an important component in allowing the US economy to create wanton runaway debt, is the fact that when its trading partner's (say, China) sell goods and services into the US economy, they are paid in US Dollars. To avoid the currency of China appreciating in value which in turn would make Chinese products more expensive and thus less competitive, instead of converting the dollars into thier own currency, the Chinese will look to reinvest their US dollars into US dollar denominated assets, such as government or corporate bonds, or mortgage backed securities etc.

The question I want to ask (anyone who can give an off the cuff simple explanation), is if the Chinese converted the dollars into thier currency, why would it mean that thier currency would appreciate in value? I am thinking that surely 'converting' the currency would simply mean putting more Yuan into the economy backed by dollars in the bank and the immediate thing that I think of when more units of currency are poured into an economy is inflation (which is a depreciation of a unit of currency)

This may seem like a dumb question, but I am having difficulty in picturing how this mechanism works.

Edited by Retardstic

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I believe the answer is roughly:

By exchanging dollar holdings, or dollar denominated holdings for yuan, they are selling dollars and buying yuan. So they are increasing demand for yuan relative to the dollar in the world currency markets, thereby strengthening the yuan versus the dollar.

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I believe the answer is roughly:

By exchanging dollar holdings, or dollar denominated holdings for yuan, they are selling dollars and buying yuan. So they are increasing demand for yuan relative to the dollar in the world currency markets, thereby strengthening the yuan versus the dollar.

That seems to make sense......but only on a certain level.

I think I missing several layers of knowledge regarding currency creation and currency markets.

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I believe the answer is roughly:

By exchanging dollar holdings, or dollar denominated holdings for yuan, they are selling dollars and buying yuan. So they are increasing demand for yuan relative to the dollar in the world currency markets, thereby strengthening the yuan versus the dollar.

(from further research into the topic area)

A further explanation, would be that when foreign payments are deposited within a nations banking system, the banks operating within a Fractional Reserve Banking System uses these deposits to create lots of credit, which is invested in the economy, thus with lots more money going around prices are pushed up and the economy becomes therefore less competitive.

The tightrope that China (and many other economies) are therefore walking is one of balancing the development of their national economy with that of there international competitiveness.

Edited by Retardstic

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  • 312 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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