Quote from ptirookie:
I'm wondering about a sentence - article from The Independent (UK) - that I don't manage to make sense of, it's the following:
"...Long-term US government interest rates - Treasury yields - also dropped, helped not only by the Fed's monetary stance but also by an insatiable demand from the Chinese and other emerging investors as they intervened to prevent their currencies from appreciating excessively."
My question is: How the simple fact to buy a US government bond (albeit in large quantities for the Chinese investors) could be thought as a currency intervention to prevent its value appreciation ?
My guess is, it may not be easy to explain that mechanism. But I would be glad to hear your thoughts about it.
The interest rate is changed by alterations in liquidity in money supply or increases or decreases in the availability of credit.
By changing the interest rate the availability of credit changes making the money supply a greater or lesser amount which in turn changes its exchange rate through the supply of monetary units. In other words a lower interest rate means more money that can be leant out, this in turn means there are more dollars for other countries to buy making it cheaper against their currency.
So the interest rate is directly linked to exchange rates through this mechanism.
I don't think the comment in the Telergraph is correct. Or at least not correctly described.
I think they are saying that the emerging countries are buying foreign debt to reduce the credit supply in their own country this would stop their currencies from being too strong because the supply of money has not increased domestically because credit has not been expanded in their own country. Also currency has to be exchanged to buy US Treasuries this would reduce the value of the currency of the country that purchased the bonds.
Has that helped?