Some countries, many being developing countries, peg their currency to the US dollar. What effect does...

Some countries, many being developing countries, peg their currency to the US dollar. What effect does a rapid appreciation or devaluation of the dollar have on those countries?Some countries, many being developing countries, peg their currency to the US dollar. What effect does a rapid appreciation or devaluation of the dollar have on those countries?

Expert Solution

Let us consider a developing nation like India where the Indian rupee is pegged to the US dollar.

When the US dollar rapidly appreciates, the exporters from India to the US will have great advantage as they will get more money for the product they sell whereas the importers will suffer as they have to pay more local currency for the imports.

When the US dollar depreciates rapidly, the reverse happens, the exports will suffer and the importers will have an advantage. As the dollar depreciates, the exporters will get less money for the product they export whereas importers will pay less the products that they import.

Also, in terms of economy, the inflation in the developing country like India will increase when the dollar suddenly appreciates. Since India imports most of the crude oil, as the US dollar appreciates, the crude prices increases and the overall inflation in the country increases. Hence the appreciation of the US dollar increases inflation and results in the increasing of interest rates by the central bank in the developing country.

On the other hand, the depreciation of the US dollar decreases inflation and results in the lowering of interest rates by the central bank in the developing country.

jeff jeffy answered 2 years ago

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