Posted by forex at 4:23 AM
Read our previous post
1. Remember that any increase in the number of transactions in a country with a foreign currency means that the local currency is more and more edged out of economic life. If the local currency is not used in the majority of cases in the local economy, inflation will be the result since the locally printed money has nothing to do.
2. Study the extent to which currency is used as a weapon. Russia, for example, owns a great amount of American dollars. This means that the Russian state has some control over the value of the dollar. If Russia were to dump the dollar on the market, the value of the US dollar would fall, possibly with disastrous results for the American economy. Therefore, the state owning a certain amount of a foreign currency is a form of international diplomacy and warfare. On the other hand, the private use of a foreign currency means the irrelevance of the home currency.
3. Seek to understand the economic situation of the specific country under study. Usually, smaller, nationalist states will seek to limit foreign transactions with a great degree of vigilance. An example of this is Vietnam, which permits only “reasonable” foreign currency transactions in the country. Otherwise, all transactions must be done in the Vietnamese currency. The state reserves the right to force the sale of foreign currency if the Vietnamese currency is threatened. Therefore, the Vietnamese government demands that all "unreasonable" foreign cash accounts must be sold to the state bank.
4. Keep in mind that local currencies demand to be the top currency in the country under study, but that the state should be amassing other currencies to use as foreign exchange. In the Russian case, a large percentage of all foreign currencies amassed in the private sector must be traded in for rubles. Hence, the state amasses foreign currency for international business, yet the private sector is forced to do business in the home currency. This keeps the home currency strong while weakening the foreign currency. A weak currency is really another word for local inflation and the potential destruction of the economic life of the population. This can be avoided if the local currency is continually active in the economic life of the society and therefore, currency control laws are enacted to enforce this.