1. Assume that substantial capital flows occur between the United States, Country A, and Country B, in all directions. If interest rates in Country A decline, how could this affect the value of Currency A against the dollar? How might this decline in Country A’s interest rates possibly affect the value of Currency B against the dollar? Interest rates, inflation, and exchange rates are highly correlated; interest rates have been used by Central banks to exert influence over exchange rate and inflation as a fiscal policy, high interest rates attract foreign capital and tries to rise the exchange rate, on the other hand this impact could be mitigated by the high inflation differential between countries (Bergen, 2010, para. 5). As a general rule, A fall in the interest rate will lead to a fall in the value of the currency against other currencies, if Country A interest rate declines, then more investors in that country will withdraw their money from the banks in order to invest them in the U.S., therefore, the funds transferred to the U.S. would pressure Country A’s currency to lose value (Aashwin, 2005). Moreover, Country A interest decrease will encourage the demand of U.S. currency while the supply of Country A’s currency will rise, thus, Country A’s currency will depreciate or worth less in terms of the U.S. dollar. Similarly, Country A’s investor might find viable to exchange Country A’s currency for Country’s B currency as a bridge to finally make a conversion to U.S. dollars. As a result, Country’s A currency will depreciate against Country’s B currency, and Country’s B currency will depreciate against dollar when the demand for U.S. dollar rises. Briefly, an investor in A exchange to B to take advantage of B-U.S. exchange ... ... middle of paper ... ...rate was pressured by larger imports than exports, which caused increased the demand of other currencies and the supply of Russian currency (Carty, 2013, para. 4). Briefly, a trade deficit and high inflation both pressure the exchange rate to depreciate. Works Cited Aashwin, (April 24, 2005).The Impact of a Rise in Interest Rates on UK Sterling Exchange Rate. Retrieved from: http://www.bized.co.uk/learn/economics/govpol/macropolicies/interest/exchange/index.htm?page=4 Carty, S. (2013). What Are the Causes of Currency Depreciation?. Retrieved from: http://www.ehow.com/list_7436779_causes-currency-depreciation_.html#ixzz2xxFW1LZf Madura J. (2010). International Financial Management. US: South-Western. Moffatt, M. (2014). Purchasing Power Parity: Link Between Exchange Rates and Inflation. Retrieved from: http://economics.about.com/od/purchasingpowerparity/a/ppp.htm
Inflation is one of the main reasons for raising the interest rate, but currently inflation is not doing it usual numbers when it comes to a growing economy. It is expected for inflation to rise during this period but it is fact currently falling. So if inflation isn’t rising as expected that leads to the dollar being stronger than expect as well. Now a strong dollar is good and bad, it is bad because it will cause our exports to cost more for other countries. With a lot of other economies struggling recently the U.S. exports could take a hit because of lower conversion rates. Now if the Fed raises the interest rate to combat inflation the strength of the dollar may stay high, which in turn could hurt the export market of our
So when the dollar is depreciating, the exchange rate becomes smaller. Exchange rate (foreign exchange rate, forex rate or FX rate) is the number of units of a given currency that can be purchased for one unit of another currency. The United States capital markets are becoming more attractive to foreign investors. Since the dollar is falling, it makes foreigner’s investment in the United States more affordable. Therefore, foreigners take this opportunity to invest in the United States.
...d lend less money. During such period the central bank pumps more money to the local economy which it already secured through the bailout money from Russia. Also, it does adjust its policy allowing Banks to keep lower capital, thus allowing more money available for lending and stimulate the economy. The central Bank also made higher ruble rates for those who have saved in dollars before devaluation of the currency and help those with Belarus rubles make purchases in dollars (Belarus scraps currency restrictions, 2011). The foreign businesses such as automobile industry have many vehicles on the lot, but needs additional foreign currency such as euro or dollar for procuring services and parts. The local Ruble needs to strengthen its values otherwise, many foreign and multinational companies will have to close its business due to lack of access to the foreign exchange.
The value of the US dollar relevant to other currencies is a major consideration for the Federal Reserve. If they prevent large changes in the value of the dollar, firms and individuals can comfortably plan ahead to purchase or sell goods abroad.
Canada’s inflation has risen 7% in the last five years. As the price of Canada’s goods increase, the U.S. is looking elsewhere to buy its products. The supply of the U.S. dollar would decrease in Canada and the U.S. dollar would appreciate. In order to get an exact reading of the actions taken by Canada, we must look at their inflation compared to the U.S. I looked at http://www.stls.frb.org/fred/data/cpi/cpiaucsl, and I found that the U.S. had an 11% inflation rate. This means that product price of the U.S. has risen faster to that of Canada. This means that Canada was possible taking there business elsewhere, causing the dollar to depreciate.
Walker, Bruce. "Euro Likely to Keep Losing Value." The New American. The New American Magazine, 7 July 2010. Web. 23 May 2011. .
...price and devaluation of the domestic currency to bring it back to A from A’ the country has to sell off its Foreign assets.
there was volatility in the currency market, and the value of the USD dropped vs the euro or the
According to Cuddington( 1989, pp32), the policies would effected include external borrowing strategy, exchange rate management, trade orientation and aggregate demand policies. This essay would explain two key policies.
The paper is divided into two main parts. The first part contains analysis of the historical data about interest rates, exchange rates, and 3-month T-bills (Kazakhstani name: MEKKAM) in two countries: Kazakhstan and USA. The second part gives implications based on the res...
...or more competitive in those markets. For example; for most of the 1990s, the U.S. dollar appreciated against most of the other world currencies. As the dollar increased in value, U.S. companies doing business in other parts of the world saw their profits, earned in other currencies, decrease when converted to dollars (Folsom & Boulware, 2009, p. 172). This problem is more famous in the third world countries that had weak to medium economic situation and suffered from improve or decline in the value of their local currencies against the US dollar in some particular periods. The company here are required to do some special arrangements to deal with that condition every time is happen. For instance; they can reduce their prices or make some discounts when this situation take place to remain compete in the markets against other local or even international organizations.
Foreign exchange is a commodity, and its price fluctuates based on supply and demand, like any commodity. This is not the place for a complete discussion of supply and demand as relates to foreign exchange, but for our purposes, we will assume that supply of and demand for a country’s currency moves along with the supply of or demand for that country’s products or the products of its trading partners. For example, if one country buys many more goods from its neighbor than its neighbor buys from it, the balance of payments at the end of the year will cause its neighbor’s currency to be in great demand, thereby driving its price up.
Laidler, D., (1966). “The Rate of Interest and the Demand for Money: Some Empirical Evidence”, Journal of Political Economy, Vol. 74, pp. 545–555.
< How do interest rates affect inflation? >, (n.d.). Bank of England. Retrieved 4 April, 2006, from http://www.bankofengland.co.uk/education/targettwopointzero/inflation/ratesAffectInflation.htm
The foreign exchange market is one of important mechanism in the international business because foreign exchange is an intermediary for all nations in term of the growth of the economy. There are many functions of foreign exchange market in the global economy. In the international business, it uses the foreign exchange markets in four ways. First, the pay...