DEFINITION of 'Dollar Drain'

When a country imports more goods and services from another country than it exports back to the same country. The net effect of spending more money importing than is received from exporting causes a net reduction in the importing country's reserves of the exporting country's currency.

BREAKING DOWN 'Dollar Drain'

For example, if Canada has exports $500 million worth of goods and services to the U.S. and has also imported $650 million worth of goods and services from the U.S., the net effect will be a reduction in Canada's U.S. dollar reserves.

A dollar drain position should not be maintained indefinitely. As a result of the laws of supply and demand, importing more than is exported may cause a devaluation of the importing country's currency. However, this effect will be mitigated if foreign investors pour their money into the importing country's stocks and bonds, as these actions will increase the demand for the importing country's currency, causing it to appreciate in value.

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