As well as factors such as interest rate and inflation, the
exchange rate is one of the most important determinants of the relative level
of the accuracy of the country's economy. Exchange rate plays a vital role in
the level of trade of the state, which is vital for all free market economies
in the world. For this reason, the exchange rate is among the most standards
that are monitored and analyzed and manipulated by the government. But the
exchange concern is on a smaller scale as well as they affect the real return on investors' portfolios. And now look to some of the
most important of the main forces behind the movements of the exchange rate.
Before we look at these engines, you must determine how they
affect exchange rate movements in trade relations between the two countries.
The most expensive currency makes the country's exports more expensive and
exports cheaper in foreign markets, and the cheaper currency makes the
country's exports cheaper and imports more expensive in foreign markets. It can
be expected that the exchange rate is high to reduce the trade balance of the
state while the low exchange rate could raise it.
Determinants of the exchange rate:
There are many factors that determine the exchange rate, and
all are linked to the commercial relationship between the two states. Remember,
the relative exchange rates and expressed in the form of a comparison between
the two currencies. Here are some initial determinants of exchange rates
between two currencies. Note that these factors are not arranged according to
specific order, as is the case with many of the economic principles, the
relative importance of these factors needs to be a lot of discussion.
Differences in inflation rates
As a general rule, the state that has a low inflation rate
continuously provides increased value of the currency, where its purchasing
power is getting compared to other currencies. During the latter half of the
twentieth century, the countries that have low inflation included Japan,
Germany and Switzerland, while the United States and Canada have achieved low
inflation at a later time. States that have a high rate of inflation usually
experiencing a decline in the values of their currencies compared to its
trading partners currencies. And is usually accompanied by a higher rate of
interest.
Interest rate differentials
Inflation and interest rate and exchange rate are all linked
strongly. Through the manipulation of the interest rate, the central banks
affects both inflation and the exchange rate, and variable interest rate
affects inflation and currency values. a high interest rate Offers for
borrowers in the economy higher returns compared to other countries. For this
reason, the high interest rate attracts foreign capital and cause the lifting
of the exchange rate. However, the impact of the high exchange rate reduces if
inflation was much higher in the state than others, or whether there are other
factors that serve to reduce the value of the currency. Adverse relationship exists
for the declining interest rate - and that the interest rate at least helps to
reduce the exchange rate.
The current account deficit
The current account is the trade balance between the state
and its trading partners, and reflects all payments between countries for goods
and services, benefits and derivatives. The current account deficit shows that
the state spend more on foreign trade than achieved, and that it is borrowing
capital from foreign currency more than it gets through the sale of exports, and
it provides its currency more than foreign demand for its products. Excess
demand for foreign currency reduces exchange rate of the state so that local
services and goods become cheap enough
for foreigners and foreign assets can be very expensive to achieve sales in the
domestic interest.
Public debt
States inter in a large deficit in funding through the
payment of public sector projects and government funding. While such activities
stimulate the local economy, the countries that have a large public deficit be
less attractive for foreign investors. The reason is that large deficits
encourages inflation, and if inflation is high, debt service will be paid off
in the end, through dollars less in the future.
In the worst cases, the government may print money to pay
for the large part of the debt, but the increase in the supply of money
inevitably causes inflation. In addition, the state are not able to service the
deficit through domestic means (the sale of domestic bonds or increase the
supply of money) will have the time to increase the supply of securities in
order to sell them to foreign investors, and thus lower their prices. In the
end, it is possible that the great debt becomes worrisome for foreigners if
they thought that the state threatened default on its obligations. Foreign
investors will be less willing to own the securities denominated in that
currency if the probability of a large retardation. For that reason, the
classification of the state debt (as are specified by agencies such as Moody's
or Standard & Poor's, for example) is vital in determining the exchange
rate.
Terms of trade
the ratio is That compares between export prices and import
prices, and the terms of trade has a relation with current accounts and balance
of payments. If the price of the country's exports rises at a greater rate than
the price of imports, the terms of trade will improve to its advantage.
Increase trade shows an increase in demand for the country's exports. And this
produces increase in revenue from exports, which provides an increase in demand
for the currency of the country (and an increase in the value of the currency).
If the price of exports rises at a lower rate of increase in the price of
imports, the value of the currency will decline for its trading partners.
Political stability and economic performance
It is imperative that foreign investors seek to invest in
countries that enjoys strong economic performance. State that has such a
positive characteristics work to attract investment funds from other countries
which is known to be economic or political risks. Political unrest, for
example, could cause a loss of confidence in the state and the movement of
capital to the currencies of the most stable countries.
0 comments:
Post a Comment