Emerging market authorities tend to print domestic currency to buy dollars, to prevent excessive currency appreciation.
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The market continues to expect policymakers to guide their domestic currency even higher over the coming days.
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So, the China nds up with dollars, but has printed an equal value amount of domestic currency.
The big concern in emerging economies is capital outflows, as investors sell domestic currency and take the proceeds abroad.
Although most of the intervening governments have the same goal to stop their domestic currency from rising their circumstances and motivations vary widely.
If a central bank buys foreign currency to hold down the exchange rate of the domestic currency, it creates more domestic money.
They are right up to a point: investors carry less currency risk if some of a bond's return is denominated in domestic currency.
The assumption of the Peterson paper is that currency interventions are undertaken by foreign governments to suppress domestic currency values in order to render export prices more competitive.
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If investors want to switch out of domestic currency into, say, dollars (as they have been doing in Hong Kong), then the supply of domestic currency will automatically shrink.
Although Guatemala has legalised the dollar as a domestic currency in parallel with its own quetzal, many of El Salvador's other neighbours and economic competitors have floating exchange rates.
Yet Argentina's experience provides clear evidence that even currency boards, where the rate is fixed by law, and where the domestic currency has to be backed by hard-currency reserves, are not immune from crises.
Countries with plenty of reserves, such as China or India, could allow mutual funds (domestic or foreign) to issue shares in domestic currency with which they could buy foreign exchange from the central bank.
Unless this extra domestic currency is mopped up in some way, the money supply rises, banks ramp up their lending, and inflation can take off (which would increase the real exchange rate ie, taking inflation into account and reduce competitiveness).
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One reason is that their usual sources of capital, institutional investors, hitherto often trapped by regulations requiring them to keep a certain proportion of their assets in their domestic currency, are now, thanks to the euro, able to spread their wings.
If these reserves lost value, Asian economies would suffer an almighty capital loss in domestic-currency terms.
And please note: Foreign exchange reserves cannot, as a practical matter, be used to create domestic-currency growth.
More fundamentally, the average maturity of Britain's domestic-currency debt is already longer than that of any other government in the world.
Last month Dai Xianglong, the central-bank governor, announced that China is rolling out a national payment network, due to be completed by 2005, when foreign banks will also be allowed to issue domestic-currency cards to Chinese customers.
Indeed, some economists think that, with the world's two major currencies concentrating exclusively on domestic goals, currency instability might increase.
Let the currency do the dirty work, in this case, means lowering domestic wages in foreign currency terms.
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One way is to stop covering the monetary base entirely with foreign currency, and gradually move to a mixture of foreign currency and domestic government bonds.
Eventually, as more and more domestic bonds back the currency, the board can engage in open-market operations, buying and selling the bonds to nudge interest rates, just as central banks do.
And just as you don't need more than one currency circulating in a domestic economy, so you don't need more than one global reserve currency.
Many Latin American companies also state results in dollars as well as the local currency, in part because high domestic inflation rates in the 1980s made it difficult to compare local-currency results from one year to the next.
China also kept down the value of its currency, giving domestic exporters a competitive edge.
China, for instance, can boost domestic spending and let its currency appreciate as Japan did in the early 1980s.
China must foster private-sector domestic demand with a stronger currency, among other things.
Unlike a conventional central bank, which can print money at will, a currency board issues domestic notes and coins only when there are foreign-exchange reserves to back it.
While CDB's primary mandate is to support China's domestic development, with foreign currency-denominated lending accounting for only 21% of outstanding loans at the end of 2011, it is also tasked with supporting the development of China's interests overseas.
The company blamed lower gross margins, foreign currency exchange losses and domestic operator networks postponing their tenders.
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