A rise in the U.S. exchange rate means that it takes more Japanese yen, for example, to purchase one dollar. That also means that U.S. traders get more yen per dollar. Since prices of goods produced in Japan are given in yen and prices of goods produced in the United States are given in dollars, a rise in the U.S. exchange rate increases the price to foreigners for goods and services produced in the United States, thus reducing U.S. exports; it reduces the price of foreign-produced goods and services for U.S. consumers, thus increasing imports to the United States. A higher exchange rate tends to reduce net exports, reducing aggregate demand. A lower exchange rate tends to increase net exports, increasing aggregate
As demand decreases, the price would decrease and less money flow would be moving into the Treasury’s pocket. But this is not the real case at the moment, as the US Government is offering higher returns for USA bonds compared to other countries, especially those in the EU, such as Germany. The US dollar is seen as more stable than the Euro and many countries would rather buy US bonds. This in turn, increases price for bonds. Even with the recent sales of Chinese owned US bonds to stimulate the Chinese economy, economists are not worries demand for US bonds will decrease.
Changes in interest rate affect currency value and exchange rate. Interest rate and exchange rate are all correlated. Increases in interest rate cause a country 's currency to appreciate because higher interest rates provide higher rates to lenders, thereby attracting more foreign capital, which causes a rise in exchange rates and vice versa also applies. Changes in inflation cause changes in currency exchange rates. A country with a lower inflation rate will see an appreciation in the value of its currency.
Nevertheless, the US dollar is followed by a competing second candidate currency : the Euro. The Euro is the currency shared by 17 member states of the European Union (EU). Around 330 millions EU citizens now use it as their currency and enjoy its benefits, which will spread even more widely as other EU countries adopt it. It is therefore not surprising that the Euro has rapidly become the second most important international currency. In this section we will assess the possibility for the euro to become a dominant global currency rivalling the U.S. dollar in the future ; and in the same time see what impact the euro crisis has had on the Euro as a currency.
On the contrary, if a country’s currency depreciates then it leaves an impact on the imports of the country, making it more expensive. Hence, the demand for the exports increases which results in Demand-Pull Inflation which arises due to the condition where the demand of goods is more than its supply and increase in demand leads to increase in price of good because supply is the limiting factor. This is how inflation and exchange rate affect each other. Both Exchange Rate and Inflation play a crucial role in every economy, that’s why it is necessary to study the impact of both on the stock
When it is excess supply or excess demand, market forces will drive the exchange rate moving to the equilibrium (Appendix 1). The currency is appreciation when the rate of one currency increases. An increase of the demand and a decrease of the supply of that currency can lead to an appreciation. Appreciation may lead to recession as the price of exchange rate become more expensive and foreigner will slowing the demand of the imports. Whereas, it is depreciation when the rate of one currency is declines.
Moreover,it was only major advanced country that experienced negative economic growth in 2008. Japan’s banks suffered less than banks in US since Japanese held much less debt than their counterparts in US.No major Japanese bank collapsed. Biggest hit was decrease in external demand. Drop in net exports was %11.8 declined. However, the US faced considerably less decline in demand rather than Japan.
“In the years immediately prior to and immediately after Greece’s entry into the Eurozone, nominal and real interest rates came down, sharply contributing to high real growth rates” (Dellas & Tavlas 2013). Greece saw a major economic boost as a result of the currency switch. Despite that, other major economic problems
Generally countries release their data of employment after certain interval. As the rate of employment is higher people in the country gets enough chance for work of their choice and expertise. In most cases the value of currency increases as the number of unemployed people decreases. But sometimes high employment increases purchase power parity of the people and can lead to higher inflation in the country, so it can adversely affect valuation of the currency. RELATIVE STRENGTH OF OTHER CURRENCIES Currency valuations are also equally affected by global parameters.
A high inflation will depreciate the domestic currency and an increase in inflation will increase the demand for foreign goods. It also decrease export, leading to balance of payment deficit. Hence, exchange rate on the foreign base countries currency will rise which appreciate the home base currency, (Madura, 2008). He also explained the relationship using the purchasing power parity. The theory of PPP states that a basket of a good in one country should have the same cost in another country, taking into account exchange