When international tensions mount, foreign currency-denominated external credit and debt can become tools of diplomacy. If a country is a huge net creditor, its overseas assets can be taken hostage.
One example is the decision by the United States in 1950 to freeze China's dollar-denominated assets based on the Foreign Assets Control Regulation after Beijing gave military support to North Korea during the Korean War.
To evade the tactic, China converted its foreign currency reserves into British pounds. But since the pound's value was dropping against other major currencies at the time, China had to report appraisal losses on its forex reserves in succeeding years.
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