A deflated Yuan allows you to buy more Chinese goods for the same USD[1]. Regarding the second half of your question, you must look at the supply of the currenc

A deflated Yuan allows you to buy more Chinese goods for the same USD[1]. Regarding the second half of your question, you must look at the supply of the currency versus the demand for that currency. It's common for governments to intervene in foreign exchange markets as a means to an end. This makes it a difficult market to invest in, as artificial forces can move the market. Just because there might be a fundamental economic reason for the Yen to appreciate, that doesn't mean the Japanese (or some other) government won't intervene in order to improve their trade balance. The mechanism that the Chinese government uses to keep the Yuan pegged to the USD, is the purchase of U.S. treasuries[2]. Here is some additional info: http://fpc.state.gov/documents/organization/65773.pdf http://fpc.state.gov/documents/organization/65773.pdf http://www.nakedcapitalism.com/2010/03/on-chinas-currency-peg-and-potential-policy-actions.html http://www.nakedcapitalism.com/2010/03/on-chinas-currency-pe... -------------------- [1] http://en.wikipedia.org/wiki/Fixed_exchange_rate_system#Mechanism http://en.wikipedia.org/wiki/Fixed_exchange_rate_system#Mech... [2] http://www.treasury.gov/press-center/press-releases/Pages/js774.aspx http://www.treasury.gov/press-center/press-releases/Pages/js...