Why would an appreciation of domestic currency driven by export demand result in manufacturing becoming uncompetitive?
The dutch disease is based on the woes of Holland in 1977. Holland had large gas reserves and thus their exports of gas soared. As a result of this there was a large influx of foreign currency, which therefore increased the demand for the dutch currency which caused it to strengthen.
The result of a much stronger dutch currency (the ‘guilder’ at the time) is that other parts of the economy become less competitive in international markets (the local currency is too strong) and therefore it is too expensive for foreigners to now buy the products that the dutch manufacturers have made. Therefore the manufacturers become less competitive.
Hope that clears it up
The Dutch disease is the apparent causal relationship between the increase in the economic development of a specific sector (for example natural resources) and a decline in other sectors (like the manufacturing sector or agriculture).
The putative mechanism is that as revenues increase in the growing sector (or inflows of foreign aid), the given nation’s currency becomes stronger (appreciates) compared to currencies of other nations (manifest in an exchange rate).
This results in the nation’s other exports becoming more expensive for other countries to buy, and imports becoming cheaper, making those sectors less competitive.