Reply To: Targetting Currencies?


Exchange rates are the actual prices that exist among different currencies. Market baskets are makeshift computations and not market prices. Suppose there is a market basket made up of one Yen and one USD against which changes in the market-basket value of the RMB is to be determined. If the RMB appreciates 10 percent against the Yen and depreciates 15 percent against the USD, then the market-basket value of the RMB would decline 5 percent. If the Bank of China desired to keep the market-basket of the RMB stable it would have to sell RMB for Yen to devalue the RMB by 10 percent and buy RMB with USD to appreciate the RMB by 15 percent. If instead, the Bank of China sold the market-basket for RMB to appreciate the RMB by 5 percent against the market-basket, it would leave the RMB overvalued against the Yen and undervalued against the USD.