Exchange Rates Essay

2116 words - 8 pages

Introduction Beginning with the Gold Standard of the 1800s, the fixed, or pegged exchange rate system was the dominant regime for most of the twentieth century. During the time, currencies were linked to gold, meaning that the value of a local currency was fixed to a set exchange rate to gold ounces, known as the Gold Standard. The Gold Standard was first started by the UK in 1819, and being the predominant power at the time, by 1870, many countries, including the United States (adopted the Standard in 1879), have joined the Standard in an attempt to emulate the success of the UK. Flaws became apparent in the exchange rate system as many countries began abandoning the system at the start of World War I. The system undoubtedly had its advantages as the abandoning countries were later seen reverting back to the system after the war. Obvious advantages and disadvantages were associated with the system as many countries were seen joining, abandoning, re-joining and re-abandoning the system within the twentieth century. Nevertheless, historical evidence, particularly the Bretton Woods exchange rate system and the European Exchange Rate Mechanism, suggests that the advantages are significantly outweighed by the disadvantages. By 1971, major governments have begun adopting a flexible exchange rate system, and all attempts to revert back to the global peg were eventually abandoned in 1985. (Heakal) Advantages of the Fixed Exchange Regime Fixed exchange rates require that a nation match its macroeconomic policies to those of the country or countries to which its currency is pegged, this limits a country's ability to set its own policies, thereby exposing the advantages and disadvantages of the system. Fixing the value of an emerging market's currency to that of a sounder currency, which is exactly what an exchange-rate peg involves, provides a nominal anchor for the economy establishing two main benefits. In an attempt to understand the relevance of a fixed exchange rate regime it is worth examining these benefits of the system. The benefits are directly derived by the domestic country's dependence on the anchoring country's economic policies, providing simplicity and stability while lowering inflation.In the early twentieth century reasons to peg a currency were obviously linked to stability, a fixed exchange rate reduces transaction costs and reduces exchange rate uncertainty in international trade. Economic instability can increase exchange rate risk, and in turn can discourage international transactions. Especially needed for the developing nations of the time, a country may decide to peg its currency to create a stable atmosphere for foreign investment. With a peg the investor will always know what the investment value is, and therefore does not have to worry about daily fluctuations. Leveling out currency fluctuations, providing a more stable value of the currency, will undoubtedly lower risk for foreign investors and thus encourage capital inflows...

Find Another Essay On Exchange Rates

Australia's Exchange Rates and the effects from global events

1161 words - 5 pages exchange was officially set and controlled by the government.Anybody of interest is able to buy and sell currencies and what is and because exchange rates are constantly fluctuating so it is possible to gain significant income from the transactions.MAJOR EXTERNAL EVENTS THAT AFFECT THE EXCHANGE RATEThere are a considerable amount of major external events that impede upon our exchange rate. Because we use the floating exchange system our exchange rate

Understanding Exchange Rates and their impact on Management Financial Decisions

3021 words - 12 pages operations in a global economy. There is money to be made by managers who can effectively manage exchange rates in the course of their business dealings. There is money to be lost by managers who fail to recognize the significance of these rate relationships.In an effort to better understand the affects of exchange rates, we need first to define the term exchange rate. This will require looking closely at the relationship between the exchange rate and

How exchange rates are determined and their impact on the Australian economy

1383 words - 6 pages composition of the basket. Changes to the weights are usually calculated inSeptember, with the re-defined index spliced onto the existing TWI on the first business day in October.Exchange rates allow individuals, businesses and governments to buy a foreign currency for importing, investing, travelling, etc. This currency conversion occurs in a foreign exchange market (otherwise known as a forex market). In most financial papers, currencies are

Analysis Of Exchange Rates For 5 Currencies: USD, AUD,BAHT, RINGGIT, EURO

2040 words - 9 pages depreciation was 3.1781. The average amount of exchange rate data deviated from the mean (3.8936) was 0.4996(S.D). It indicates on the fact that the exchange rate of MYR/EURO has been less volatile over the period of 2001-2004(June).THAI BAHTAccording to our calculations, the average MYR/100BAHT exchange rates over the period 2001 to 2004 were 8.9497. Moreover, the peak value that Thai Baht reached over this period was 9.7862 and the lowest point

Theories of Exchange Rate Determination

906 words - 4 pages Before discussing the economic literature on the relationship between interest rates and exchange rates is full, it will be useful to briefly discuss some of the important theories of exchange rate determination. There are many theories such as the theory of Purchasing Power Purchase Agreement (PPP), the Flexible Price Monetary Model (FPM), Sticky Price Monetary Model (SPM), Real Interest Rate Differential Model (RIRD), and Portfolio Balance

Should Australia return to a fixed exchange rate, rather than a floating currency exchange system? (oral presentation)

524 words - 2 pages exchange rate. Secondly, changes in relative productivity levels, faster productivity growth leads to exchange rate appreciation. Finally, changes in interest rate differentials, high interest rates in Australia lead to higher exchange rate levels. However, the short term value can be altered my marked psychology, for example on the 5th of may 1998, incorrect rumours began to circulate in New York that one of the major rating agencies would announce

International Risk

637 words - 3 pages A corporation that operates in foreign countries must understand globalization and foreign financial risk. When a corporation operates on a global level, there are many financial risk factors that need to be taken into consideration. These risk factors include foreign exchange rates, differing interest rates from country to country, complex accounting methods for foreign operations, and foreign tax rates. To be successful at globalization

Why Is It so Difficult to Forecast Exchange Rate Movements?

1240 words - 5 pages these fundamental economic variables? Economists have long taken the view that economic fundamentals determine exchange rates. Nevertheless, in the early 1970s, after the collapse of fixed exchange rate regimes of the Bretton Woods system, excess volatility, nonlinear and disorderly movements in exchange rates became mysteries that traditional exchange rate theory cannot explain. Recent scholar concluded “no definitive evidence that economic

Financial globalization

1086 words - 4 pages financial flows, fluctuating market conditions, and exchange risks. Risk management internationally has always been a critical issue, due to financial deregulation and innovations. The unpredictability in the financial market has increased tremendously. Instability in exchange rates due to floating exchange rates, unstable interest rates both with domestic and foreign assets has exposed all the financial mangers to a greater uncertainty in

Determining the Foreign Exchange Rate

1143 words - 5 pages and differences in the interest yield on dated securities of the concerned economies. The foreign exchange rate influences purchasing power of income and capital gains obtained from returns, interest rates, inflation as well as foreign direct investment through relative wage and wealth channels. This makes exchange rates an extremely important monetary tool. However, the exchange rate itself is in fact influenced by a number of factors. 3.1.1

Report on Foreign Exchange market of Japan

2238 words - 9 pages the Japanese government. The impact of this liberalization was that many other direct players entered in the Japanese foreign market and the currency trading volume rose significantly (Reszat, 1997).Foreign Exchange Market of JapanThe foreign exchange rates in Japan are dependent on the exchange rate of Yen with the other foreign currencies of the world. In 1973, Japan government allowed the floating foreign exchange rate system. After this

Similar Essays

Exchange Rates Essay

2484 words - 10 pages Exchange Rates Missing Two Graphs “For many years it has been believed that if countries import more than they export and so have a deficit on the current account of the balance of payments then their currencies will tend to fall in value. Yet over the last two years the dollar has been a strong currency even though USA has had a record current account deficit. How can this fact be explained? What does it tell us about the factors, which

Floating Exchange Rates Essay

2506 words - 10 pages It Has A Bibliography. Very extensive research -Floating Exchange Rates: The Only Viable SolutionStentor SmithFor some, the collapse of Mexico's economy proves that floating exchange rates and marketswithout capital controls are deadly. Others find the crash of the European exchange-rate mechanism(ERM) in 1993 to be proof that targeted rates will always be overturned by the free market. Manysee the breakup of Bretton Woods as the failure of

The Changes In Foreign Exchange Rates

2249 words - 9 pages Changes in foreign exchange rates affect decisions made by businesses, investors, governments, and consumers. The rate of currency exchange between countries can impact the prices of goods and services, the supply and demand of financial assets, and interest rates. Additionally, fluctuations in foreign exchange rates can impact the bottom line of a business holding foreign exchange denominated investments. The significant impact exchange rates

Macroeconomic Variables Affecting Exchange Rates For The Us Dollar

2576 words - 11 pages 1. Introduction Exchange rates are the price of a country’s currency in terms of another country’s currency. For example, the Japanese yen is pegged to the United States dollar which is known as the USD/JPY exchange rate. This in turn, means that exchange rates have two components, the domestic currency and a foreign currency, which can be quoted either directly or indirectly. A direct quotation is the price of a unit of foreign currency