Why does accumulating foreign reserves in the currencies of a country's trading partners improve exports?
2 Answers
As people of one country buy more Goods from another than they sell to that country then the currency of the 1st accumulate in the 2nd. This is called a Trade Imbalance. This has pluses and minuses
Explanation:
Rewriting your question helps: what is the relationship between exports and the accumulation of foreign currency?
If you sell more than you buy then you will accumulate cash. Between countries, the cash is in a foreign currency and can only be used in that country's economy. This trade imbalance causes the two countries to become intertwined.
For example, the United States has a trade imbalance with China as the u.s. purchases many goods from China and the Chinese do not purchase that much from the United States. As a result, China is sitting on a large amount of u.s. dollars. If the Chinese wanted to economically hurt the United States then the Chinese could dump that currency on the international market forcing a devaluation of the US dollar. What Hurts the United States in this case would also hurt China as the value of the US dollar that China owns would fall.
As people of one country buy more Goods from another than they sell to that country then the currency of the 1st accumulate in the 2nd. This is called a Trade Imbalance. This has pluses and minuses.
Explanation:
If you sell more than you buy then you will accumulate cash. Between countries, the cash is in a foreign currency and can only be used in that country's economy. This trade imbalance causes the two countries to become intertwined.
For example, the United States has a trade imbalance with China as the u.s. purchases many goods from China and the Chinese do not purchase that much from the United States. As a result, China is sitting on a large amount of u.s. dollars. If the Chinese wanted to economically hurt the United States then the Chinese could dump that currency on the international market forcing a devaluation of the US dollar. What Hurts the United States in this case would also hurt China as the value of the US dollar that China owns would fall.
Also, holding large reserves of a foreign trade partner currency can reduce circulation and strengthen that currency. As the holder of the reserves, that country's weath increases by holding reserves. This isn't guaranteed. For example, the buying country could print more money. So, having a trade imbalancewith Venezuela may not be a good thing.
