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A Currency Crash Course for Politicians

US President Donald Trump has imposed duties on a range of Chinese goods because he thinks that China is still holding down the renminbi's exchange rate to boost its exports. But China no longer needs to sell its goods at below-cost prices, and it has been unloading its dollar-denominated foreign-exchange reserves since 2014.

MUMBAI – One major impetus behind US President Donald Trump’s protectionist policies is his belief that China has artificially weakened its currency in order to dump goods in the United States. Trump harped on this issue often during his presidential campaign. But now that he is taking action to reduce America’s bilateral trade deficit with China, there could be grave consequences for the world economy.

Trump is making a mistake. And yet his views about China’s currency should not come as a surprise, given that exchange-rate management is one of the most complex areas of economic policymaking.

I learned this the hard way while serving as an adviser to the Indian government from 2009 to 2012. After Standard & Poor’s downgraded US long-term sovereign credit from AAA to AA+ on August 5, 2011, I was surprised to see the dollar begin to strengthen. It took me a while to understand what was happening.

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