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 ...
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...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
...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.
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.
believe that the USD will depreciate against EUR and think that it can bear the risk of appreciation
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.
Walker, Bruce. "Euro Likely to Keep Losing Value." The New American. The New American Magazine, 7 July 2010. Web. 23 May 2011. .
The stability of currency values plays a significant role for economic and financial stability. It is not difficult to see the exchange rate fluctuations are widely regarded as damaging. As the movements of the exchange rate have significant and large effects on the trade balance, resource allocation, domestic prices, interest rate, national income and other key economic variables. Then can exchange rate movements be predicted by these fundamental economic variables?
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.
..., such advantages are reversed – demand for both cars and financing drops, and Ford Motor Credit is not able to generate increased profits off of its loan portfolio. When exchange rates increase, and more dollars are necessary to purchase foreign currency, the relative price of foreign goods drops and people will tend to purchase more imports. Abroad, American cars become more expensive. People abroad will therefore purchase fewer Ford vehicles. Ford theoretically suffers a double whammy – however, as in the case of the balance of payments above, it is difficult to assess the net effect on the company because it is so diversified globally. If the exchange rates decrease, the effects are reversed.
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.
...price and devaluation of the domestic currency to bring it back to A from A’ the country has to sell off its Foreign assets.
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...
Their ease of conducting business and trading across borders ranks favorably for American consider expanding in Canada (Cubbage et al., 2010). The U.S. dollar because of its strength and purchasing power is attractive to many other countries including Canada. Imports and exports play a vital role in the attractiveness of the dollar. If a wood produced in Canada is less expensive than wood produced in the U.S. imports will escalate, and exports will plummet. These factors result in the U.S. dollar being more or less enticing to consumer and investors at various intervals. Robson & Laidler (2002) explored the possibility of Canada adopting the U.S. dollar as their official currency. They argued it reduces the cost of transactions and improves decision-making in Canada. Each government can print money based on a need to combat events such as inflation and deflation and, in turn, affect the exchange
The Interest Rate (IR) is considered as one of the most important economic factors affecting every household, firm and government all over the world. It is, as described by Parkin et al (2005), the opportunity cost of holding money, that is, the price of borrower are willing to pay for the use of the loan. On the other hand, it is also the compensation to the risk that lenders take in lending the money. (investopedia.com, n.a. 2003) By lenders and borrowers, it refers to individuals, businesses, financial instruments and governments. IR can be also categorised into nominal IR that is the stated one on financial market and real IR that implies the return of investment in terms of value. IR is said to be an indicator of economy situation and reflection of government policy as well. Therefore fluctuations of IR would have great impact on different areas in the economy and it is crucial to understand what determines it and how it would affect the world.
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