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Three ways in which an  exchange rate can remain stable despite of trade deficit? Thank you.

Three ways in which an  exchange rate can remain stable despite of trade deficit? Thank you.

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Answer #1

A trade deficit puts downward pressure upon the exchange rate, so there are ways as follows to make it stable:

1. Central bank can supply Forex in the market that can increase the demand for domestic currency. It will put upward pressure upon the exchange rate and it will be stable.

2. Central bank should increase the interest rates and it will make the country to be attractive destination for investments. It will increase the demand for domestic currency and exchange rate remains stable.

3. Government or central bank can restrict the movement of capital flow going outside of the country. So, foreign institutional investors cannot supply domestic currency freely by selling their investments. It will also control the exchange rate.

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