Currency manipulation
Topic: Balance of Payments and Exchange Rates · NCERT: Beyond NCERT
Meaning
Currency manipulation means a government deliberately holds its currency's value down to gain a trade advantage. A cheaper currency makes the country's exports cheaper and its imports dearer. This helps it run large trade surpluses. The US Treasury checks for manipulation in its foreign exchange report using three criteria:
- a large trade surplus with the US
- a current account surplus
- persistent, one-sided buying of foreign currency in the market
Economies that meet some of these criteria are placed on a monitoring list.
Example
When RBI buys dollars heavily for a long time, India's foreign exchange reserves swell and the rupee is kept from rising. Because of such intervention, India has at times appeared on the US Treasury's monitoring list. RBI's stated policy is only to curb excess volatility, not to target a level.
Don't confuse with
- Forex intervention: a central bank buying or selling foreign currency, often only to calm sharp swings. It becomes manipulation only when the aim is a lasting, one-sided trade advantage.
Related concepts
- Fixed exchange rate
- Devaluation
- Revaluation
- Black market for foreign exchange
- Speculative attack
- Managed floating
- Forex intervention
- Crawling peg
- Currency board
- Impossible trinity