If the US were to hypothetically stop exporting overnight, would demand for US dollars quickly dry up? (Assuming here there are no other nations that have the US dollar as their official national currency, but that other nations did informally used it, as many do).
I was discussing this with some friends and argued yes, as I felt that the ultimate reason for there being a demand for a countries currency outside of that country was to purchase their exports. However, particularly in the case of the US dollar, my friends felt it would continue to hold value in countries where it is used informally as people would just continue to perceive it had value and that was enough to maintain it as a usable currency.
Interested to hear your thoughts to settle this debate.
Is a countries exports the ultimate driver of its currencies value abroad?
byu/Fine-Thing5240 inAskEconomics
Posted by Fine-Thing5240
2 Comments
The issue here is that there is a broad level question and a specific country/currency question.
Broadly speaking, the strength of the currency is determined by production, exports and inward investments. There are other factors like stability and legal landscape and openness to capital flows.
Then there is the US and USD. It is still a fairly dominant currency used in international trade intermediation even when the trading countries have their own domestic currency. It is also seen as one of the benchmarks for a safe currency. So it has its own unique reasons for being highly valued.
Countries which export to the US (i.e. US imports) get paid in dollars. They have to exchange these dollars for their own currency (say euros), which involves selling them back to the US for whatever amount the US has of Euros.
So both imports and exports have an impact.