Indirect intervention

Capital controls (taxing international transactions) and exchange controls (restricting trade in currencies) are indirect interventions. Indirect intervention influences the exchange rate indirectly.

Chinese Yuan Devaluation

There had been a large increase in American imports of Chinese goods in the 1990s and 2000s. China’s central bank allegedly devalued Yuan by buying large amounts of US dollars. This has increased the supply of the Yuan in the market, and also increased the demand for US dollars, increasing the Dollar price.

At the end of 2012, China had a reserve of $3.3 trillion, which is the highest foreign exchange reserve in the world. Roughly, 60% of this reserve is US government bonds and debentures.

The actual effects of the devalued Yuan on capital markets, trade deficits, and the US domestic economy are highly debated. It is believed that the Yuan devaluation helps China as it boosts its exports, but hurts the United States by widening its trade deficit. It has been suggested that the US should apply tariffs on Chinese goods.

Another viewpoint is that US protectionism may hurt the US economy. Many think the undervalued Yuan hurts China more in the long-run, as a devalued Yuan doesn’t subsidize the Chinese exporter, but subsidizes the American importer. Thus, they argue that importers within China have been substantially hurt due to the large-scale foreign exchange intervention.

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