Currency Review – Foreign Exchange Rate
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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
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
83.0590
80.5800
-2.479
Appreciate
Mexico
12.0851
11.6050
-0.4801
Appreciate
Philippines
43.6049
42.6340
-0.9709
Appreciate
Russia
Ruble
29.2303
28.0991
-1.1312
Appreciate
South Africa
7.1728
6.65769
-0.51511
Appreciate
South Korea
1,126.83
1,054.85
-71.98
Appreciate
Switzerland
Franc
0.9488
0.83619
-0.11261
Appreciate
Turkey
1.5988
1.62610
0.0273
Depreciate
Source:
Compare Feb 2011 rates with July 2011 rates
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 nations 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. Chinas 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