Economics
Foreign Exchange Rates
Foreign exchange rates refer to the value of one currency in terms of another. They are determined by the foreign exchange market and fluctuate based on supply and demand dynamics, as well as geopolitical and economic factors. Exchange rates play a crucial role in international trade, investment, and financial transactions, impacting the competitiveness of a country's exports and imports.
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8 Key excerpts on "Foreign Exchange Rates"
eBook - PDF- Rhona C. Free(Author)
- 2010(Publication Date)
- SAGE Publications, Inc(Publisher)
It can be argued that not only the value of a currency but also its predictability can affect interna-tional businesses. If one company is going to have opera-tions in a country whose currency has an uncertain future value, then there may be uncertainty about this company's future revenues, operational costs, and therefore profits. As it is well known, risk-averse companies prefer to decrease the risk and uncertainty of future revenues and costs. In addition to its importance for trade and investment across countries, the exchange rate is important as the essential component of the foreign exchange market or FX market. The FX market, the global market for cur-rencies, is the largest and most liquid financial market in the world. According to a survey conducted by the Bank for International Settlements (2002), the average daily trade in the FX market surpasses U.S.$1.2 trillion. All of these reasons and many more make study of exchange rates an essential component of the curriculum for any student of economics or aspiring economist. That is why this handbook has decided to dedicate an entire chapter to the topic of exchange rates. In this chapter, you will learn about the functioning of the foreign exchange rate system. We start by giving a historical account of the different exchange rate systems around the world. In the past, particularly in the period from World War II to the end of the Bretton Woods era, it was common for many countries around the world to have fixed exchange rates. That is, the value of the currency was pegged to the value of some other currency. This arrangement was adopted by different countries with the hope that it would avoid uncertainty about the value of their currency and the economic conse-quences of such uncertainty. Nowadays, most major cur-rencies are flexible, and their values are determined by demand and supply in the foreign exchange market.
eBook - PDFEconomics for Investment Decision Makers
Micro, Macro, and International Economics
- Christopher D. Piros, Jerald E. Pinto(Authors)
- 2013(Publication Date)
- Wiley(Publisher)
We also show how to calculate cross-exchange rates and how to compute the forward exchange rate given either the forward points or the percentage forward premium or discount. In Section 4, we describe alternative exchange rate regimes operating throughout the world. Finally, in Section 5, we discuss how exchange rates affect a country’s international trade (exports and imports) and capital flows. A summary and practice problems conclude the chapter. 466 Economics for Investment Decision Makers 2. THE FOREIGN EXCHANGE MARKET To understand the FX market, it is necessary to become familiar with some of its basic conventions. Individual currencies are often referred to by standardized three-letter codes that the market has agreed on through the International Organization for Standardization (ISO). Exhibit 9-1 lists some of the major global currencies and their identification codes. It is important to understand that there is a difference between referring to an individual currency and to an exchange rate. One can hold an individual currency (for example, in a EUR100 million deposit), but an exchange rate refers to the price of one currency in terms of another (for example, the exchange rate between the EUR and USD). An individual currency can be singular, but there are always two currencies involved in an exchange rate: the price of one currency relative to another. The exchange rate is the number of units of one currency (called the price currency) that one unit of another currency (called the base currency) will buy. An equivalent way of describing the exchange rate is as the cost of one unit of the base currency in terms of the price currency. EXHIBIT 9-1 Standard Currency Codes Three-Letter Currency Code Currency USD U.S.
eBook - PDF- Steven A. Greenlaw, David Shapiro, Daniel MacDonald(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
Whoever buys those dollars will have to use them to purchase American goods and services, so the money comes right back into the American economy. At the same time, the consumer saves money by buying a less expensive import, and can use the extra money for other purposes. Fluctuations in Exchange Rates Exchange rates can fluctuate a great deal in the short run. As yet one more example, the Indian rupee moved from 39 rupees/dollar in February 2008 to 51 rupees/dollar in March 2009, a decline of more than one-fourth in the value of the rupee on foreign exchange markets. Figure 29.9 earlier showed that even two economically developed neighboring economies like the United States and Canada can see significant movements in exchange rates over a few years. For firms that depend on export sales, or firms that rely on imported inputs to production, or even purely domestic firms that compete with firms tied into international trade—which in many countries adds up to half or more of a nation’s GDP—sharp movements in exchange rates can lead to dramatic changes in profits and losses. A central bank may desire to keep exchange rates from moving too much as part of providing a stable business climate, where firms can focus on productivity and innovation, not on reacting to exchange rate fluctuations. One of the most economically destructive effects of exchange rate fluctuations can happen through the banking system. Financial institutions measure most international loans are measured in a few large currencies, like U.S. dollars, European euros, and Japanese yen. In countries that do not use these currencies, banks often borrow funds in the currencies of other countries, like U.S. dollars, but then lend in their own 29.3 • Macroeconomic Effects of Exchange Rates 709 domestic currency. The left-hand chain of events in Figure 29.9 shows how this pattern of international borrowing can work. A bank in Thailand borrows one million in U.S. dollars.
eBook - PDF- David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
Whoever buys those dollars will have to use them to purchase American goods and services, so the money comes right back into the American economy. At the same time, the consumer saves money by buying a less expensive import, and can use the extra money for other purposes. Fluctuations in Exchange Rates Exchange rates can fluctuate a great deal in the short run. As yet one more example, the Indian rupee moved from 39 rupees/dollar in February 2008 to 51 rupees/dollar in March 2009, a decline of more than one-fourth in the value of the rupee on foreign exchange markets. Figure 16.9 earlier showed that even two economically developed neighboring economies like the United States and Canada can see significant movements in exchange rates over a few years. For firms that depend on export sales, or firms that rely on imported inputs to production, or even purely domestic firms that compete with firms tied into international trade—which in many countries adds up to half or more of a nation’s GDP—sharp movements in exchange rates can lead to dramatic changes in profits and losses. A central bank may desire to keep exchange rates from moving too much as part of providing a stable business climate, where firms can focus on productivity and innovation, not on reacting to exchange rate fluctuations. One of the most economically destructive effects of exchange rate fluctuations can happen through the banking system. Financial institutions measure most international loans are measured in a few large currencies, like U.S. dollars, European euros, and Japanese yen. In countries that do not use these currencies, banks often borrow funds in the currencies of other countries, like U.S. dollars, but then lend in their own 16.3 • Macroeconomic Effects of Exchange Rates 399 domestic currency. The left-hand chain of events in Figure 16.9 shows how this pattern of international borrowing can work. A bank in Thailand borrows one million in U.S. dollars.
eBook - PDFExchange Rate Regimes
Fixed, Flexible or Something in Between?
- I. Moosa(Author)
- 2006(Publication Date)
- Palgrave Macmillan(Publisher)
The shift has led to the emergence of two thriving and interrelated industries: exchange rate forecasting and foreign exchange risk management. The problem is that forecasting exchange rates is much more difficult than predicting who will win a penalty shoot- out between England and another team in a World Cup or a European Cup quarter-final, or even the inflation rate to prevail next year. Given that exchange rate forecasting is used extensively in financial decision- making, the shift has created problems as well as opportunities for multi- national businesses and, indeed, businesses with exposure to the outside world. In fact, even businesses that do not deal with the outside world are exposed to foreign exchange risk because exchange rate changes may induce foreign competitors to enter the domestic market. International financial operations, such as capital budgeting, are much more complicated under flexible exchange rates because another dimension of risk (foreign exchange risk) is added. In the case of domestic currency financing, the cost of financing is equal to the interest rate on the domestic currency, which is known in advance. Financing in a foreign currency under fixed exchange rates means that the cost of financing is equal to the interest rate on the foreign currency, which is The Role of the Exchange Rate in the Economy 33 also known in advance. Thus, it is possible, under fixed exchange rates, to compare the two known costs and choose the cheaper financing mode (domestic currency or foreign currency financing). Under flexible exchange rates, the cost of financing in a foreign currency is equal to the interest rate on the foreign currency plus the percentage change in the exchange rate (the percentage change in the value of the foreign cur- rency). This component is not known in advance, which means that an element of risk is introduced into foreign currency financing.
eBook - PDFInternational Economics
Global Markets and International Competition
- Henry Thompson(Author)
- 2000(Publication Date)
- WSPC(Publisher)
In Figure 11.2 the equilibrium exchange rate is $/yen = 0.008 and the equilibrium quantity of FX traded is 20 trillion yen (per hour). FX markets are based on demand and supply of foreign currencies. The price of foreign exchange is the exchange rate, the relative price of the foreign currency in terms of home currency. EXAMPLE 11.1 FX Rates Exchange rates change continuously and are quoted in newspapers, on the internet, at banks, airports, and trading houses. In countries highly involved with international trade and investment, exchange rates are on die front page and traders set up exchange windows on every busy street. Even banks in small US towns now offer foreign exchange service. As the US economy becomes more open, Foreign Exchange Rates grow in importance to the economy. In countries with quickly depreciating or appreciating currencies, the exchange rate influences everyday business decisions. The second column below is the value of the currency in US dollars, the units used in the text. The first column is the value of the dollar in the foreign currency. New York FRB, 12 Noon Buying Rates Sat Oct 30 19:30:01 1999 GMT Australian Dollars Austrian Schillings Belgian Francs Brazilian Real British Pounds Canadian Dollars Chinese Renminbi Danish Kroner Euro Finnish Markka French Francs German Marks Greek Drachmas Hong Kong Dollars To US Dollar 1.5684 13.082 38.353 1.9530 0.6088 1.4720 8.2778 7.0680 0.9508 5.6529 6.2365 1.8595 314.00 7.7690 In US Dollar 0.6376 0.0764 0.0261 0.5120 1.6425 0.6793 0.1208 0.1415 1.0518 0.1769 0.1603 0.5378 0.0032 0.1287
eBook - PDF- J. Mills(Author)
- 2012(Publication Date)
- Palgrave Macmillan(Publisher)
32 Exchange Rate Alignments to persuade that they have been aiming at precisely the wrong objective for all their working lives. All these sentiments are wrapped up in the widely used rhetoric of exchange rates. When a currency’s value is high, it is strong. When low, it is weak. When it depreciates, its value falls. When it appreciates, it rises. Loaded terms colour everyone’s perceptions. The reality, however, is different. If a country’s currency is too strong, its exports wither, its manufacturing declines, investment and the savings to pay for it fall, living standards for most people stagnate, life chances deteriorate, the foreign exchange and fiscal balances tend to go into deficit, and its rela- tive power and position in the world falls away. This is a terrible price to pay for misconceptions which need to be exposed and which ought not to prevail. Finally, it is surprisingly difficult to disentangle all the existing empir- ical evidence on the impact of exchange rates on economic perform- ance. Table 2.1 sets out some telling statistics, which show how far from being clear-cut and obvious the evidence is. It is clear that between 2000 and 2010 exchange rates and the proportion of the economy devoted to manufacturing were not alone in determining growth rates. Russia and Saudi Arabia did very well out of high oil prices. Greece, Spain and Ireland benefited hugely, for a while at least, from the Eurozone. India, Brazil and the USA were helped by positive demographics. Japan was hindered by a high exchange rate, and Germany by the hangover from unification. Towards the end of the decade, the West was hit much harder than the East by the financial crisis. Disentangling the critical impact of exchange rates is therefore not easy. The really crucial point is that all the other factors which have clearly had an impact on the growth rates in Table 2.1 are largely if not wholly beyond any govern- ment’s capacity to influence.
eBook - PDF- Brian Kettell(Author)
- 2001(Publication Date)
- Butterworth-Heinemann(Publisher)
At issue is the extent to which a country’s economic performance and the mechanism whereby monetary and fiscal policies affect inflation and growth are dependent on the exchange rate regime. There is no perfect exchange rate system. What is best depends on a particular economy’s characteristics. A useful analysis in the IMF’s May 1997 World Economic Outlook considers some of the factors which affect the choice. These include the following. Size and openness of the economy . If trade is a large share of GDP, then the costs of currency instability can be high. This suggests that small, open economies may be best served by fixed exchange rates. Inflation rate . If a country has much higher inflation than its trading partners, its exchange rate needs to be flexible to prevent its goods from becoming uncompetitive in world markets. If inflation differentials are more modest, a fixed rate is less troublesome. Labour market flexibility . The more rigid wages are, the greater the need for a flexible exchange rate to help the economy to respond to an external shock. Degree of financial development . In developing countries with immature financial markets, a freely floating exchange rate may not be sensible because a small number of foreign exchange trades can cause big swings in currencies. The credibility of policymakers . The weaker the reputation of the central bank, the stronger the case for pegging the exchange rate to build confidence that inflation will be The global foreign exchange rate system and the ‘Euroization’ of the currency markets 179 controlled. Fixed exchange rates have helped economies in Latin America to reduce inflation. Capital mobility . The more open an economy to inter-national capital, the harder it is to sustain a fixed rate.
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