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Currency Review - Foreign Exchange Rate

Essay by   •  August 14, 2011  •  Essay  •  1,067 Words (5 Pages)  •  1,729 Views

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Case Study - Foreign exchange rate

Country Currency

(per U.S Dollar) Rate

(Feb 22 2011) Rate

(July 10 2011) Different % Appreciate/

Depreciate

Argentina Peso 4.0230 4.0955 0.0725 Depreciate

Brazil Reals 1.6690 1.5642 -0.1048 Appreciate

Britain Pound 0.6181 0.6226 0.0045 Depreciate

Canada Dollar 0.9842 0.9616 -0.0226 Appreciate

China Renminbi 6.5776 6.4640 -0.1136 Appreciate

India Rupee 44,8600 44.2700 -0.59 Appreciate

Indonesia Rupiah 8,865.00 8,488.96 -376.04 Appreciate

Japan Yen 83.0590 80.5800 -2.479 Appreciate

Mexico Peso 12.0851 11.6050 -0.4801 Appreciate

Philippines Peso 43.6049 42.6340 -0.9709 Appreciate

Russia Ruble 29.2303 28.0991 -1.1312 Appreciate

South Africa Rand 7.1728 6.65769 -0.51511 Appreciate

South Korea Won 1,126.83 1,054.85 -71.98 Appreciate

Switzerland Franc 0.9488 0.83619 -0.11261 Appreciate

Turkey Lira 1.5988 1.62610 0.0273 Depreciate

Source: http://www.oanda.com/currency/converter/

1.0 Compare Feb 2011 rates with July 2011 rates

2.0 Calculate percentage increase or decrease

3.0 Reasons for Changes

3.1 Supply and demand

The USD against a basket of currencies weakened on the possibility of further monetary stimulus by the Fed. It hit a new record low against the other safe haven currencies. (sg.finance.yahoo.com)

The value of a nation's currency is determined like any other assets, goods and services. The dollar will fall, or depreciate against other currencies when the supply of dollars on the exchange market increases faster than the demand and vice versa. The value of a currency is measured by its purchasing power relative to other currencies.

3.2 Balance of Payment

U.S. trade deficit in goods and services increased to $50.2 billion in May from $43.6 billion (revised) in April, as imports increased and exports decreased. (tradingeconomics.com)

Deterioration of the U.S. balance of payment will cause depreciation in the value of the dollar in the foreign exchange markets. Growth in imports of goods and services and a slowdown in export can lead to a worsening of the balance of payment because more money is leaving the circular flow of income through imports than coming in from exports. It will have a negative impact on interest rate and foreign investment. The outflow of funds will also affect the currency exchange rate.

3.3 Government actions

From 1997 until mid-2005, China had a fixed exchange rate with United States. The Chinese Yuan was pegged at 8.28 to the dollar. Since then, China has abandoned the peg to the US dollar in favour of a basket of currencies. (moneyexchangesonline.com)

Exchange-rate policy is a form of monetary policy. When a currency is pegged below market rate, it amounts to a kind of subsidy that keeps export priced low. China's currency has appreciated the least and only against the weakening US dollar. However, in open trade dependent economies where currencies have been allowed to appreciate, the stronger currency lower import prices which help cool off inflation.

3.4 Speculation

The currency crisis of Thailand, which provided the catalyst for the entire Asian meltdown in 1997, is an example of how currency speculation can successfully bring economic problems into view. (Henderson, 83-84).

A country can use interest rates and currency interventions to artificially keep the currency at a high exchange rate, hiding the underlying problems in the short run but the delay will worsen when the eventual corrections occurs. The currency market speculators often target an exchange rate that they believe to be fundamentally over or undervalued. Such a flow of speculative funds can have a powerful effect in the currency markets.

3.5 Inflation

High interest rate and appreciating currency attracts capital inflow of funds. The increase in domestic currency supply aggravates

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