Why does a more powerful currency or higher exchange rate mean less competitive exports?

Question

I hear this all the time. China artificially decreases the value of their currency by buying up USD to make their products more competitive in the global market. Traveling to Europe is cheaper now that the Euro has gotten slightly weaker. How does this work?

Let’s say Grayboot Dollars are pegged to US Dollars at a 1:2 ratio. If I want to export my product to the US for US$2, won’t I simply price it at GD$1? It’ll cost slightly less in my currency, but that’s to be expected because it’s a powerful, deflated currency. So how exactly does this work?

In: 3

Answer 1

Because companies pay their employees in their local currency. If the local currency is artificially manipulated so 1 dollar buys more of that local currency, then the exports of that country would be cheaper to buy with the US dollar.