How to increase money value

1. Sell foreign exchange assets and buy their own currency

China has over $1.4 trillion of US government bonds. If the Chinese sold these Treasury bills and brought back the proceeds to China, this would cause a depreciation in the dollar, and the Chinese Yuan would appreciate. (supply of dollars would rise, and demand for Chinese Yuan would increase) Because China has substantial dollar assets, they could cause a reasonably significant fall in the value of the dollar.

In fact, China could appreciate the value of their currency simply by not buying any more dollar assets. Currently, China has a large current account surplus with the US. This flow of money into China would usually cause an appreciation. However, China has deliberately decided to use its foreign currency earnings to buy US assets. They do this to keep the Yuan weaker and therefore keep their exports more competitive.

In the case of Russia and Brazil, they only have relatively limited dollar reserves. Therefore, there is only limited scope for selling dollars and buying their own currency.

2. Higher interest rates

Higher interest rates would attract some ‘hot money flows‘. Hot money flows occur when banks and financial institutions move money to other countries to take advantage of a better rate of return on saving. Given interest rates are close to zero in the US, higher interest rates in developing countries give a significant incentive to move money and savings there.

·       However, as a drawback, higher interest rates may reduce the rate of economic growth (see the effect of higher interest rates). In many circumstances, e.g. in recession, higher interest rates would not be suitable due to side effect on economic growth. Though if the economy was booming, higher interest rates would cause an appreciation and moderate the rate of economic growth.

3. Expectations

At the moment, it is hard to find a country which wants to have a stronger exchange rate. For example, Switzerland was once seen as a ‘safe haven’ currency. This caused investors to buy Swiss Francs. However, the Swiss government and Central Bank were worried about the appreciation in the Swiss Franc causing problems for exporters. If a country gave a credible assurance that they were targeting a higher exchange rate, this might encourage speculators to move money into that country.

4. Reduce inflation

If inflation is relatively lower than competitors, then the countries goods will become more attractive and demand will rise. Lower inflation tends to increase the value of the currency in the long term. Toreduce inflation, the government / Central bank can pursue tighter fiscal and monetary policy and also supply-side policies.

4. Long-term supply-side policies

In the long term, a strong currency depends on economic fundamentals. To have a stronger exchange rate, countries will need a combination of low inflation, productivity growth, economic and political stability.

For example, if India increased interest rates, this might not be enough to cause an appreciation in the exchange rate. This is because, despite high-interest rates, investors would be concerned about the high inflation in the Indian economy.

To increase the value of the currency in the long-term, the government will need to try supply-side policies to increase competitiveness and cut costs of production, for example, privatisation and cutting regulations may help the export industry become more competitive in the long-term.