An NPR podcast called The Indicator about how China and other countries have historically manipulated currency. (It’s a good, accessible, informative show albeit a little cutesy at times, especially this episode. But short and worth it.)
China purchases a large amount of USD on the market. This glut of supply of yuan coupled with the scarcity of dollars drives up the international exchange rate for dollars and drives down the rate for yuan. This allows China to increase its exports to the U.S. because it’s such a better deal to be able to buy more stuff with a dollar.
Then an economist said that there is a way that the U.S. can respond to this that is so simple that he is surprised we’ve never done it. Just buy up a bunch of yuan to balance off the effect.
First, what would we do with all the yuan? Second, it seems like this would create a never-ending currency war that would result in each currency rising so high that neither country to afford to sell anything except to each other. Why would an economist suggest this as a reasonable counter-strategy?