Dollar Drain
Categories: Econ, Regulations, International
If a country is experiencing a dollar drain, it's a sign that that country needs to decrease its trade deficit with the U.S.
Yup, the U.S. specifically. Since the U.S. dollar is the most powerful global currency (for now) thanks to its strong economy, many countries around the world care about their relative exchange rate to the USD.
Dollar drain is when a country is importing more goods from the U.S. than it's exporting to the U.S. This trade deficit with the U.S. could result in a drop in the value of the importing country's currency relative to the U.S. dollar.
Why? If there's a continuing, long-term reduction in USD in an importing country, the decrease in USD supply causes an increase in USD demand. If the demand for USD increases while the importing country's currency supply remains constant, than the USD becomes more valuable relative to the importing country's local currency.