Why would a central bank or country not want their currency to appreciate against other currencies?

Question

From Investopedia:

Pegged Rates: Pegging occurs when one country directly fixes its exchange rate to a foreign currency so that the country will have somewhat more stability than a normal float. More specifically, pegging allows a country’s currency to be exchanged at a fixed rate with a single or a specific basket of foreign currencies. The currency will only fluctuate when the pegged currencies change.

The downside to pegging would be that a currency’s value is at the mercy of the pegged currency’s economic situation. For example, if the U.S. dollar appreciates substantially against all other currencies, the yuan would also appreciate, which may not be what the Chinese central bank wants.

Can anybody explain to me why a Central bank would NOT want its currency to appreciate against other currencies?

Answer 1

I wrote about the dynamic of why either of a lower or higher exchange rate would be good for economies in Would dropping the value of its currency be good for an economy?

A strong currency allows consumers to import goods cheaply from the rest of the world. A weak currency allows producers to export goods cheaply to the rest of the world. People are both consumers and producers. Clearly, there have to be trade-offs.

Strong or weak mean relative to Purchasing Power Parity (i.e. you can buy more or less of an equivalent good with the same money).

Governments worrying about unemployment will try and push their currencies weaker relative to others, no matter the cost. There will be an inflationary impact (imported inputs cost more as a currency weakens) but a country running a major surplus (like China) can afford to subsidise these costs.

Answer 2

It would essentially make goods from other countries more cheaper than goods from US. And it would make imports from these countries to China more expensive.

The below illustration is just with 2 major currencies and is more illustrative to show the effect. It does not actually mean the goods from these countries would be cheaper.

1 GBP = 1.60 USD

1 EUR = 1.40 USD

1 CNY = 0.15 USD

Lets say the above are the rates for GBP, EUR, CNY.

The cost of a particular goods (assume Pencils) in international market is 2 USD.

This means for the cost of manufacturing this should be less than GBP 1.25 in UK, less than 1.43 in Euro Countires, less than 13.33 CNY in China. Only then export would make sense.

If the real cost of manufacturing is say 1.4 GBP in UK, 1.5 EUR in Euro countires, clearly they cannot compete and would loose.

Now lets say the USD has appreciated by 20% against other currencies. The CNY is at same rate.

1 GBP = 1.28 USD

1 EUR = 1.12 USD

1 CNY = 0.15 USD

Now at this rate the cost of manufacturing should be less than GBP 1.56 GBP, less than 1.78 EUR in Euro Countires. In effect this is more than the cost of manufacturing.

So in effect the goods from other countires have become cheaper/compatative and goods from China have become expensive.

Similarly the imports from these countires to China would be more expensive.