Dollar Drain

Dollar drain occurs when a country imports more goods and services from another country than it exports back to the same country. The net effect importing than exporting causes a net reduction in the importing country’s reserves of the exporting country’s currency.

A dollar drain cannot be sustained indefinitely. Due to the laws of supply and demand, importing more than exporting will likely cause a depreciation in the importing country’s currency. However, this effect will be mitigated if foreign investors pour their money into the importing country’s securities, as these actions will increase the demand for the importing country’s currency, causing it to appreciate in value.