Long run exchange rates are the result of trading patterns. People in different countries sell their products around the world and get paid in their own currency, or convert what they’re paid into their own currency. This creates demand for their currency. The relative demand for the different currencies will set the exchange rates. Countries with trade deficits will have currency that tends to go down in value. Those with trade surpluses will have currencies that appreciate in value.

With the changing value in currency there will be responses in international trade. The products of nations with trade surpluses will become more expensive as the currency goes up, and vice versa for those with trade deficits.

These market forces get distorted as countries try to manipulate currency values. Generally, the stated goal is to try to keep things stable. If they try to go against market forces for too long, their efforts will disastrously fail. States can try to prop up their currency by buying up the surplus, but they need foreign currency to do that. When they run out, they can’t support their currency anymore, and it goes down anyway, and they’ve sold all their foreign reserves in the meantime.

The major industrialized nations do work together to try to stabilize relative values. They can’t go against the long term market trend, but they can manage short term fluctuations to minimize market disruption. A country’s holdings of foreign currency is an important measure of the strength of their currency, and their ability to stabilize their currency.

I think things have changed in that there are now much easier flows of money and capital around the world. People and companies are better willing and able to hold foreign assets where they are. That would tend to stabilize the currency, but there is concern that it also makes the other country vulnerable to sudden withdrawal of foreign owned assets.

If you flood the foreign markets with your currency, you create an excess supply of it, and the value goes down. That makes other currencies stronger in comparison, which wrecks the economies of exporter nations.

Or if you soak up much of your currency that is in circulation in foreign markets, you create a scarcity and your currency becomes more valuable. That wrecks your own export business.

One way of moving your currency in or out of foreign markets is by your balance of trade. If you have a trade surplus, like we had before 1980, you are selling more than you buy, and your currency gets stronger.

If you hae a trade deficit like we have had since 1980, you are buying more than you sell, and the foriegn markets are getting flooded with your currency. Your currency then gets weaker.

That tends to have a self-correcting effect, because when your currency gets weaker it costs more to buy imports and your trade balance tends to stabilize.

That is not happening today relative to Chinese currency, because the Chinese are manipulating their currency to keep it weak so they can keep exporting to us. That is bleeding money out of our economy while they have crowbarred the self-correcting mechanism, so our economy will continue to self-destruct until we find a president who has the sense to put a stop to this insanity.