Foreign exchange market, Детальна інформація

Foreign exchange market
Тип документу: Реферат
Сторінок: 4
Предмет: Іншомовні роботи
Автор: Олексій
Розмір: 13.8
Скачувань: 1013
Depreciation or appreciation is the appropriate concept to deal with floating, or flexible, exchange rates, whereas devaluation or revaluation is appropriate when dealing with fixed exchange rates.

In the dollar-pound exchange market, the demand schedule for pounds represents the demands of U.S. buyers of British goods, U.S. travelers to

Britain, currency speculators, and those who wish to purchase British stocks and securities. It slopes downward because the dollar price to U.S. residents of British goods and services declines as the exchange rate declines. An item selling for Ј1 in Britain would cost $2.00 in the U.S. if the exchange rate were Ј1/$2.00 U.S. If this exchange rate declined to

Ј1/$1.50 U.S., the same item is $.50 cheaper in the United States, increasing the demand for British goods and thus the demand for pounds. The supply schedule of pounds represents the pounds supplied by British buyers of U.S. goods, British travelers, currency speculators, and those who wish to purchase U.S. stocks and securities. It slopes upward because the pound price to British residents of U.S. goods and services rises as the $ price of the Ј falls. Assuming an exchange rate of Ј1 /$2.00 U.S., a $2.00 item in the U.S. costs Ј1 in Britain. If this exchange rate declined to Ј1/$1.50

U.S., the same item is 33 percent more expensive in Britain, decreasing the demand for dollars to buy U.S. goods and thus reducing the supply of pounds. The equilibrium exchange rate in Figure 1 is Ј1/$2.00 U.S. The amounts supplied and demanded by the market participants are in balance.

Figure 2

[pic]

To understand better the schedules, several of the factors that might cause these curves to shift are discussed next. If there is a decrease in national income and output in one country relative to others, that nation's currency tends to appreciate relative to others. The domestic income level of any country is a major determinant of the demand for imported goods in that country (and hence a determinant of the demand for foreign currencies). Figure 2 shows the effects of a decline in national income in

Britain (assuming all other factors remain constant). The decrease in

British income implies a decrease in demand for goods and services (both domestic and foreign) by British people. This reduction in demand for imported goods leads to a reduction in the supply of pounds, which is shown by a leftward shift of the supply curve in Figure 2 (from S[pic] to

hange rate floats freely, the British pound appreciates against the U.S. dollar. If the exchange rate is artificially maintained at the old equilibrium of Ј1/$2.00 U.S., however, a balance-of-payments surplus (for Britain) likely results.

Figure 3

[pic]

In Figure 3, an initial exchange-rate equilibrium of Ј1/$2.00 U.S. is assumed. Now presume the rate of price inflation in Britain is higher than in the United States. British products become less attractive to U.S. buyers (because their prices are increasing faster), which causes the demand schedule for pounds to shift leftward (D[pic] to D[pic]). On the other hand, because prices in Britain are rising faster than prices in the

U.S., U.S. products become more attractive to British buyers, which causes the supply schedule of pounds to shift to the right (S[pic] to S[pic]). In other words, there is an increased demand for U.S. dollars in Britain. The reduced demand for pounds and the increased supply (resulting from British purchases of U.S. goods) mandates a newer, lower, equilibrium exchange rate. Furthermore, as long as the inflation rate in Britain exceeded that in the United States, the British pound would continually depreciate against the U.S. dollar.

Differences in yields on various short-term and long-term securities can influence portfolio investments among different countries and also the flow of funds of large banks and multinational corporations. If British yields rise relative to others, an investor wishing to take advantage of these higher interest rates must first obtain British pounds to buy the securities. This increases the demand for British pounds shift the demand schedule in Figure 4 to the right (D[pic] to D[pic]). British investors are also less inclined to purchase U.S. securities, moving the supply schedule of pounds to the left (S[pic] to S[pic]). Both activities raise the equilibrium exchange rate of the British pound in terms of U.S. dollars.

Figure 4

[pic]

3. Factors affecting foreign exchange rates

. Balance-of-Payments Position

The exchange rate for any foreign currency depends on a multitude of factors reflecting economic and financial conditions in the country issuing the currency. One of the most important factors is the status of a nation's balance-of-payments position. When a country experiences a deficit in its balance of payments, it becomes a net demander of foreign currencies and is forced to sell substantial amounts of its own currency to pay for imports of goods and services. Therefore, balance-of-payments deficits often lead to price depreciation of a nation's currency relative to the prices of other currencies. For example, during most of the 1970s, 1980s, and into the 1990s, when the United States was experiencing deep balance-of-payments deficits and owed substantial amounts abroad for imported oil, the value of the dollar fell.

. Speculation

Exchange rates also are profoundly affected by speculation over future currency values. Dealers and investors in foreign exchange monitor the currency markets daily, looking for profitable trading opportunities. A currency viewed as temporarily undervalued quickly brings forth buy orders, driving its price higher vis-a-vis other currencies. A currency considered to be overvalued is greeted by a rash of sell orders, depressing its price.

Today, the international financial system is so efficient and finely tuned that billions of dollars can flow across national boundaries in a matter of hours in response to speculative fever. These massive unregulated flows can wreak havoc with the plans of policymakers because currency trading affects interest rates and ultimately the entire economy.

. Domestic Economic and Political Conditions

The market for a national currency is, of course, influenced by domestic conditions. Wars, revolutions, the death of a political leader, inflation, recession, and labor strikes have all been observed to have adverse effects on the currency of a nation experiencing these problems. On the other hand, signs of rapid economic growth, improving government finances, rising stock and bond prices, and successful economic policies to control inflation and unemployment usually lead to a stronger currency in the exchange markets.

Inflation has a particularly potent impact on exchange rates, as do differences in real interest rates between nations. When one nation's inflation rate rises relative to others, its currency tends to fall in value. Similarly, a nation that reduces its inflation rate usually experiences a rise in the value of its currency. Moreover, countries with higher real interest rates generally experience an increase in the exchange value of their currencies, and countries with low real interest rates usually face relatively low currency prices.

. Government Intervention

It is known that each national government has its own system or policy of exchange-rate changes. Two of the most important are floating and fixed exchange-rate systems. In the floating system, a nation's monetary authorities, usually the central bank, do not attempt to prevent fundamental changes in the rate of exchange between its own currency and any other currency. In the fixed-rate system, a currency is kept fixed within a narrow range of values relative to some reference (or key) currency by governmental action.

National policymakers can influence exchange rates directly by buying or selling foreign currency in the market, and indirectly with policy actions that influence the volume of private transactions. A third method of influencing exchange rates is exchange control—i.e., direct control of foreign-exchange transactions.

The online video editor trusted by teams to make professional video in minutes