How does a country manipulate its currency

Simply explained, in order to weaken its currency, a country sells its own currency and buys foreign currency – usually U.S. dollars. Following the laws of supply and demand, the result is that the manipulating country reduces the demand for its own currency while increasing the demand for foreign currencies.

How Does a Country Manipulate Its Currency?

Currency manipulation is a policy used by governments and central banks of some of America’s largest trading partners to artificially lower the value of their currency (in turn lowering the cost of their exports) to gain an unfair competitive advantage.

Simply explained, in order to weaken its currency, a country sells its own currency and buys foreign currency – usually U.S. dollars. Following the laws of supply and demand, the result is that the manipulating country reduces the demand for its own currency while increasing the demand for foreign currencies.

How Do We Know a Country Has Manipulated Its Currency?

The International Monetary Foundation (IMF) and the World Trade Organization (WTO) have provisions prohibiting the use of currency manipulation to gain trade advantages. Based on IMF principles, a three-part test can be used to clearly identify a currency manipulator within existing or future trade agreements:

  • Did Country X have more exports than imports (an account surplus) over a set six-month period?
  • Did Country X add to its foreign exchange reserves over that same six-month period?
  • Are Country X’s foreign exchange reserves more than sufficient (i.e. over three months’ normal imports)?

Do Monetary Policy and Quantitative Easing Fall under This Test?

No. The currency rules recommended by leading economists would NOT affect monetary policy. The test is narrowly targeted to capture the most egregious policy – direct intervention – and in
no way restricts the ability of a country to engage in independent monetary policies like quantitative easing.