Essentially the larger the government deficit the more dollars in circulation and will put downward pressure on the dollar exchange rate. This interplays obviously with other countries.
Generally true, but it’s not a 100% correlation. If you’re forex trading, you know that. If the correlation was 100%, then forex trading would be easy, and everyone would do it.
Today, a unit of currency is essentially a share of stock in the issuing company’s economy. The US Fed has been diluting those shares for a decade now, and today the dollar index is currently at or close to its 10-year high. This has occurred despite the Fed’s massive balance sheet increase due to QE. That’s counterintuitive to the theory, and goes back to the US being the “least shitty alternative” in the post-2009 world.
In 2015, the Fed started to imply that it was about to start shrinking its balance sheet. That was apparently enough to set the dollar skyrocketing against most other currencies (the Swiss Franc being the interesting exception, I believe). Of course, they’re still just TALKING about shrinking the balance sheet, but apparently that will actually happen during 2017. So they say.
Yes it is important to have an export sector to keep competitive exchange rates but if the amount if a currency is kept limited in supply then it will intrinsically hold value to anyone wishing to exchange it. Most exchange rate issues are from pegging to external limits like to a foreign currency or gold.
Well, right. This is getting into the issue of China, for example, behaving as a currency manipulator. In international trade theory, free trade benefits both sides because it is assumed that everyone is letting their currencies float; the country with the trade deficit should see the value of their currency decline vis a vis their trading partners with trade surpluses; the currencies adjust, and along with them the trade imbalance mitigates.
In the case of China, they do NOT let their currency float, and in fact adjusted their currency downwards last year, I believe. So, in effect, they are keeping all the benefits of free trade for themselves.