Forex markets, exchange rate determination


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Forex markets, exchange rate determination

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Forex markets, exchange rate determination

  1. 1. -Apurv Verma
  2. 2. 1. How is the value of a currency determined? The factors which determine currency value.2. Forex Rate or the FX Rate.
  3. 3.  How do we actually evaluate the value of money? It is a simple question but with possibly complex answers. Is it the value we see? and moreover this value is never constant. Both domestic and international forces exert their influence on the value of a currency. What determines the value of a countries currency really comes down to supply and demand of that currency. If a particular countries currency is in high demand by purchasers such as travelers, governments, and investors, this will increase the value of the countries currency. The factors that follow may have a positive or negative affect on the demand for a particular currency. Lets take a look at these factors.
  4. 4.  If a country prints an excessive amount of currency, more then what it normally would, this can decrease the value of the currency. Any time you have more of anything, this can result in a decrease in its value. This is true whether you are talking about currency or commodities such as iron ore, crude oil, coal, gold, silver and platinum. A large amount of currency in circulation can lower the value of a currency. A small amount of currency in circulation can result in the value of the currency increasing.
  5. 5.  If a countries economy is not doing well, this can decrease the demand for that countries currency. Specifically, here we are talking about the degree of unemployment, degree of consumer spending, and extent of business expansion that is taking place in a country. High unemployment, decrease consumer spending, with a decrease in business expansion, means a poor economy and a decrease in currency value. The potential for economic growth in a country should also be looked at. If the potential is strong, then its currency value would expect to increase. Also, if a country produces products that other countries want to buy, this can increase the value of that countries currency
  6. 6.  Related to the economy, is the prices of foreign goods. If a foreign company sells goods in a country which are cheaper then comparable products produced in that country, this can hurt the economy of that country. A poor economy results in a decrease in demand for that countries currency, which lowers its value.
  7. 7.  To what degree does political corruption exist within a country? To what degree do political affairs have on the economy of that country? A country which is known to have corrupt politicians, can result in a lowering of the value of its currency.
  8. 8. A country which operates at a high level of secrecy, at least as observed by those outside the country, can result in a lowering of the value of their currency. Another words, if not much is known about a country due to a restriction of media expression within that country, this can lower the value of its currency.
  9. 9.  To what degree are politicians addressing a national debt problem? Are politicians causing an increase in the national debt? In a democratic society, national debt must be paid by the taxpayer. If taxes increase, this results in a lowering of the purchasing capability of society, which results in a disruptive affect on the economy. In this case, currency value will decrease.
  10. 10.  Ifa president is popular, this can increase the demand for a currency. If the presidents popularity is dropping, due to unpopular government policies, this may result in a decrease in demand for a currency and a subsequent lowering of its value.
  11. 11. A terrorists attack can increase the probability of a war. A war or the strong potential for a war can decrease the demand for a currency, simply because a war drains the economy. Wars are expensive and must be paid by the taxpayer. You simply can not have a growing economy during war time. So war lowers the value of a currency.
  12. 12.  Isgovernment growing and expanding too much? New growth by developing departments, and creating unnecessary programs, all costs money. Again, the taxpayer will need to pay for the new growth, which for the long run has a negative affect on the economy. Excess government growth can lower the value of a countries currency.
  13. 13.  Taxcuts can stimulate the economy, as long as the consumer spends the extra money he or she may have. But also, tax cuts which are too large can result in high demand for products, which may raise prices, which can lead to inflation and the desire to purchase cheaper foreign products. But in general, tax cuts historically have been good for the economy, which can result in an increase demand for that countries currency.
  14. 14.  Rupee appreciated significantly in 2006 – 2007 and the above mentioned were the reasons for the Rupee appreciation since India had stable government with favorable economic climate. USA and other multi- national companies started investing in India and they bought more Indian Rupees and the demand for rupee increased which in turn appreciated the rupee value.
  15. 15.  Infinance, the exchange rates (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other. It is the value of a foreign nation’s currency in terms of the home nation’s currency. For example an exchange rate of 91 Japanese yen (JPY, ¥) to the United States dollar (USD, $) means that JPY 91 is worth the same as USD 1
  16. 16. Strong dollar reduces the export value of US Companies and likewise strong rupee reduces the export value of Indian companies.Assume ABC had agreed to supply 10 inners to Macy’s in US @ $100 per piece in 2004 when the Rupee value against the dollar was 46. ABC would have earned Rs.46000 in 2004 by supplying 10 inners. But suddenly the Rupee value increased and in 2007 Rupee value was 40 against a US Dollar (You are able to buy 1 dollar by giving Rs.40 instead of Rs.46). ABC would now earn just Rs.40000 for supplying the same 10 inners and it gets affected by reduced revenues.
  17. 17.  Forex Trading is trading currencies from different countries against each other. Forex is acronym of Foreign Exchange. For example, in Europe the currency in circulation is called the Euro (EUR) and in the United States the currency in circulation is called the US Dollar (USD). An example of a forex trade is to buy the Euro while simultaneously selling US Dollar. This is called going long on the EUR/USD.
  18. 18.  Forex trading is typically done through a broker or market maker. As a forex trader you can choose a currency pair that you expect to change in value and place a trade accordingly. For example, if you had purchased 1,000 Euros in January of 2005, it would have cost you around $1,200 USD. Throughout 2005 the Euro’s value vs. the U.S. Dollar’s value increased. At the end of the year 1,000 Euros was worth $1,300 U.S. Dollars. If you had chosen to end your trade at that point, you would have a $100 gain.
  19. 19.  Stock Analysis Online Wikipedia July 8, 2005 issue of Executive Intelligence Review.