USD a double-edged sword ! The US never defaults — it inflates - Examples !
Now It’s Double Action Tariff plus USD depreciation DXY moves up to 96 level from 115!
World took time to understand - USD Depreciation & Other Currencies (Why it hurts them)
Why China Kept Yuan stable and appreciating parity?
Why Japan Kept Interest rate as zero and stable Yen! Acted as tool to US economy !
Examples -
USD depreciation =
Earlier $100 = ₹8,300, now $100 = ₹7,500
So other currencies strengthen.
Why that’s negative for others
- Their exports become expensive
- Their GDP growth slows
- Their trade surplus shrinks
Example (Exports)
- Indian exporter sells goods worth ₹7,500
- Earlier:
- $100 × ₹83 = ₹8,300 → exporter earns more
- After USD depreciation:
- $100 × ₹75 = ₹7,500 → ₹800 loss
- Same effort, lower income
This is why China, Japan, Germany dislike a weak USD.
Impact on Exports (Global Trade)
Who benefits?
- 🇺🇸 US exporters
- 🇺🇸 US manufacturing & services
Who loses?
- Export-dependent economies (India, China, Korea, Vietnam)
Example
US exporter:
- Cost = $90
- Selling price = $100
Foreign buyer:
- Earlier: €100 = $100
- Now: €90 = $100 (USD weaker)
👉 US product becomes 10% cheaper
👉 US exports rise
👉 Non-US exports fall
Carry Trade Impact (Big money movement)
What is carry trade?
Borrow in low-interest currency, invest in high-interest currency.
Historically:
- Borrow USD at 1–2%
- Invest in INR, BRL, MXN at 6–10%
Example with $100
Investor:
- Borrows $100
- Converts to INR at ₹83 → ₹8,300
- Invests at 8% → ₹8,964 including interest
Now USD depreciates:
- Exit conversion at ₹75
₹8,964 ÷ 75 = $119.5
👉 $19.5 profit
👉 Carry trade booms
But then comes the danger
- Local currencies over-strengthen
- Asset bubbles form
- When USD reverses → sudden crashes
This is why EM countries fear volatile USD cycles.
PPP (Purchasing Power Parity)
Meaning
Currencies adjust so that same goods cost same globally.
Example (Big Mac logic)
- US burger = $5
- India burger = ₹300
Fair FX rate:
₹300 ÷ $5 = ₹60/$
If market rate is ₹83/$:
👉 INR is undervalued
👉 USD is overvalued (Scope for Depriciation)
REER Real Effective Exchange Rate is similar concept and based on the same INR level was around 110-115 when DXY USD Index was at 115. Before USD depreciation.
USD depreciation effect
USD moves toward ₹60/$ from ₹83/$
That means:
- USD loses purchasing power
- Other currencies gain
With $100
Earlier:
- $100 buys ₹8,300 worth goods
After depreciation:
- $100 buys ₹6,000–₹7,000 goods
👉 US inflation
👉 Imported goods cost more
How USD Depreciation REDUCES US Debt Burden
This is the most important part
Key fact
US debt is denominated in USD
Foreigners hold ~30–35%
Example
US owes $100 to foreign investors.
Earlier:
- €100 = $100
After USD depreciation:
- €90 = $100 ( Local-Forwigner/Investor) to get less money in local currency !
👉 Foreign lender loses purchasing power
👉 US repays with weaker dollars
This is a silent debt haircut.
How Interest Obligation Reduces (Indirectly)
USD depreciation helps the US reduce real interest burden via inflation.
Example
- US debt = $100
- Interest = 5% → $5 per year
If inflation rises to 4% due to weak USD:
- Real interest = 1%
So:
- Real cost = $1 (not $5)
👉 Inflation + weak USD = debt erosion
This is most dangerous stand of US and that is why FED is not agreeing ! It takes into vicious cycle and reversal becomes a challenge as this will not be possible unless there is a trade surplus and again trust is built into USD ! As the demand for USD has to increase ! The Pace / velocity / rate of change will create higher risk !
As against this - if Reduced Rate policy is maintained for few years ( Like Japan ) with zero rate and reduced inflation,
This is why:
“The US never defaults — it inflates.”
Why This Is Negative for Other Countries
For USD creditors
- They receive weaker dollars
- Real returns fall
For USD importers
- Oil, commodities priced in USD become volatile
For central banks
- FX reserves (USD) lose value
Summary Table (Using $100)
|
Area |
Effect of USD Depreciation |
$100 Example |
|
Exports (non-US) |
Negative |
₹8,300 → ₹7,500 |
|
US Exports |
Positive |
US goods cheaper |
|
Carry Trade |
Boosts inflows |
$100 → $119 |
|
PPP |
USD loses power |
$100 buys less |
|
US Debt |
Real burden ↓ |
$100 repaid cheaper |
|
Interest Cost |
Real rate ↓ |
5% → 1% |
Smartest Truth
A weak dollar is bad for exporters, good for US debt, dangerous for emerging markets, and fuel for global asset bubbles. Smartest Double Edged Sword with Support of SWIFT and Insurance Business of world - Nothing is left for others !
China yen strategy of appreciation and stability against USD - how it helped china and companies like Apple, Tesla and investors for FDI in-terms of returns to investors ! Basis PPP , exchange rate, repatriation and translation risk coverage.
China didn’t fully float its currency like the yen or euro. Instead it used:
- Managed peg to USD
- Low volatility
- Gradual, predictable appreciation phases
- No sharp devaluations unless forced (2008, COVID, property stress)
🎯 Goal:
Make China a safe manufacturing + investment base, not a currency casino.
This is similar in spirit to Japan’s yen stability strategy during its export boom (1970–1995), but with tighter capital controls.
2️⃣ Why stability is better than weak currency ( written and analysed before many times )
Many think “weak currency = export advantage”. China learned something deeper:
If currency is:
- ❌ Too weak → inflation, capital flight, investor distrust
- ❌ Too volatile → FDI discounts returns heavily
- ✅ Stable or mildly appreciating → FDI explodes
👉 China chose predictability over cheapness.
3️⃣ How this helped Apple, Tesla & MNCs in China
A. Manufacturing economics (Apple example)
Apple manufactures in China but sells globally.
If RMB is stable vs USD:
- Cost of iPhones in USD is predictable
- Supplier contracts don’t need heavy FX buffers
- Long-term capex decisions become viable
📌 Result:
Apple could commit $10s of billions to China supply chains without FX fear.
If RMB were volatile like BRL or TRY:
- Apple would demand higher margins
- Or shift production earlier
B. Tesla Shanghai Gigafactory
Tesla invested ~$2 bn+ in China.
Key FX advantages:
- Revenues in RMB
- Costs in RMB
- Debt partly RMB-linked
- Minimal FX mismatch
But more importantly…
📌 Exit value certainty:
When Tesla repatriates profits or values the China entity, USD translation risk is limited.
4️⃣ FDI investor returns — the hidden FX alpha
Let’s use a simple $100 FDI example.
Scenario 1: Stable / mildly appreciating RMB
- Initial investment: $100 → RMB 700
- Annual IRR (operational): 12%
- After 5 years value: ~RMB 1,230
If RMB appreciates 2% p.a.:
- FX gain ≈ +10%
- USD exit value ≈ $190
- Effective IRR ≈ 14.5–15%
👉 FX stability boosts dollar returns
Scenario 2: Volatile / depreciating currency
Same operations, but:
- RMB depreciates 4% p.a.
- FX loss ≈ −18%
- USD exit value ≈ $155
- Effective IRR ≈ 9–10%
👉 Same factory, same profits — investor outcome wildly different
💡 This is why FDI floods into stable-FX countries.
5️⃣ PPP (Purchasing Power Parity) angle
China used PPP undervaluation slowly converging upward.
- Labor productivity rose faster than wages
- Export surpluses kept FX reserves strong
- RMB should appreciate under PPP
- China allowed slow appreciation, not shock moves
📌 Effect:
- Foreign investors felt PPP tailwind, not risk
- Repatriated dollars bought more real value
6️⃣ Translation & repatriation risk — how China neutralized it
A. Translation risk (financial reporting)
For Apple / Tesla:
- Stable RMB = stable USD earnings translation
- Lower EPS volatility
- Higher valuation multiples
Wall Street rewards predictability.
B. Repatriation risk (dividends, exits)
China:
- Allowed profit repatriation for FDI
- Used capital controls mainly on outflows by locals, not MNC profits
- FX reserves ensured convertibility confidence
📌 Investors trusted:
“When I exit, my dollars will come back — intact.”
7️⃣ Why Japan yen strategy worked earlier (and differs)
Japan (1970–85):
- Yen stability helped exports
- Post-Plaza Accord forced sharp appreciation
- Export margins collapsed
- Asset bubble formed
China learned from this mistake:
- No sudden revaluation
- No free float
- No Plaza-style shock
👉 China copied Japan’s early success, avoided its later errors.
8️⃣ Big picture: why this created a China super-cycle
Because of FX stability:
- ✅ Apple built deepest supply chain ever
- ✅ Tesla made China its most profitable plant
- ✅ PE/VC funds accepted lower IRR hurdles
- ✅ FDI inflows stayed strong even during geopolitics
FX stability became China’s invisible subsidy.
9️⃣ Investor takeaway (very important)
For global investors:
Operational returns + FX stability = true alpha
China understood:
- You don’t need a weak currency
- You need a trusted currency
That trust alone added 200–400 bps to foreign investor returns.
- Compare China vs India FX strategy
- Explain why INR volatility scares long-term FDI
- Or analyse what happens if RMB breaks stability now
Perfect — let’s do ALL of it, cleanly and decisively.
I’ll break this into 3 tight layers, so you can see the full macro → investor → India contrast picture without noise.
China vs India FX Strategy — why outcomes diverged
🇨🇳 China:
FX as industrial policy
- Managed RMB vs USD
- Low volatility (±3–5% bands)
- FX reserves used as shock absorber
- Capital controls to prevent panic exits
🎯 Objective:
Maximize long-term FDI + manufacturing scale, not short-term trade gains
🇮🇳 India:
FX as shock absorber
- INR allowed to depreciate gradually
- RBI smooths volatility, not direction
- Current account deficit funded via flows
- No hard commitment to stability band
🎯 Objective:
Absorb oil shocks, inflation, capital flow volatility
Result comparison
|
Factor |
China (RMB) |
India (INR) |
|
FX volatility |
Low |
Medium–High |
|
FX direction |
Flat / mild up |
Structural down |
|
FDI confidence |
Very high |
Moderate |
|
Manufacturing scale |
Massive |
Fragmented |
|
USD IRR predictability |
High |
Discounted |
📌 Key insight:
India uses FX defensively.
China used FX offensively.
Why INR volatility scares long-term FDI (real reason)
A. The silent IRR killer: FX depreciation
Example:
- India project IRR (local): 15%
- INR depreciation: 4–5% p.a.
- USD IRR drops to: 9–10%
👉 Suddenly India looks like:
- Equity risk without equity reward
B. Translation risk (EPS & valuation hit)
For listed MNCs:
- INR volatility → earnings volatility
- Volatile earnings → lower P/E multiple
- explaining FX noise every quarter
That’s why:
- Apple keeps India assembly tactical
- China remains strategic
C. Repatriation uncertainty (perception, not rules)
India allows repatriation — but investors fear:
- Sudden tax reinterpretations
- Retrospective claims (past legacy)
- INR liquidity stress during crises
Perception > policy text.
What happens if RMB stability breaks now
China is at a crossroads.
Scenario 1: Controlled depreciation (most likely)
- RMB weakens slowly
- FX reserves used tactically
- Export competitiveness improves
- FDI slows but doesn’t flee
📌 Outcome:
China remains investable, just less stable as before and it happened after Covid too !
Scenario 2: Disorderly break (low probability, high impact)
- Capital flight
- Forced controls on MNC profit repatriation
- Valuation collapse in China assets
- Apple/Tesla accelerate diversification
📌 Outcome:
End of “China FX premium”
Scenario 3: Re-stabilization with new anchor (smart path)
- RMB loosely tied to basket (USD + Asia)
- Less USD dependence
- Regional trade settlement in RMB
📌 Outcome:
China preserves FDI credibility
Why Apple & Tesla still tolerate China risk
Because FX risk < is less than supply chain risk elsewhere.
India/Vietnam alternatives have:
- FX volatility
- Infrastructure friction
- Policy unpredictability
- Lower supplier depth
- Older pain of Anti US - BRICS and Russian tilt
So China still wins on:
Net adjusted risk
What India must do to copy China (realistic, not slogans)
India doesn’t need a peg. It needs credibility bands.
5-point fix:
- Commit to INR depreciation ceiling (say 2–3% p.a.)
- Build FX reserves specifically for stability
- Give long-term FX hedging at sovereign scale
- Explicit FDI profit repatriation protection
- Stable tax interpretation for foreign capital
📌 Result:
- India’s 12–14% projects start yielding 11–12% USD
- Suddenly pension funds show up — not just PE tourists
truth and fact
China sold FX certainty. India sells growth stories with Portfolio money
Global capital always pays more for certainty.
