Exchange Rate Movements

1376 WordsMay 5, 20136 Pages
FIN340 304 Tutorial week 3 Questions 1. How can a central bank use direct intervention to change the value of a currency? Explain why a central bank may desire to smooth exchange rate movements of its currency.. 2. Should the governments of Asian countries allow their currencies to float freely? What would be the advantages of letting their currencies float freely? What would be the disadvantages? 3. What is the impact of a weak home currency on the home economy, other things being equal? What is the impact of a strong home currency on the home economy, other things being equal? 4. Assume the Hong Kong dollar (HK$) value is tied to the U.S. dollar and will remain tied to the U.S. dollar. Last month, a HK$ =…show more content…
By minimizing the exchange rate uncertainty, foreign business of the home country is enhanced and can attract more funds as investments. Smoothening currency movements tends to reduce fears in the financial markets and speculative activity that might lead to heavy decline in value of the currency. However, speculation can only be expected to smooth exchange rate movements if underlying economic processes are relatively stable. If there is a great deal of uncertainty over future government actions and their economic impact, expectations will not be strongly held. Thus expectations can change dramatically from day- to-day, leading to rapidly fluctuating exchange rates. 2. The government of Asian country should not allow their currencies to float freely as it may leads to critical problems to the country. Free floating currency policy may trigger speculation on currency that can bring about financial crisis. For example, the financial crisis of Asia countries in 1997, the most famous speculator George Soros had benefited billions of money by going short of the Asian countries currency which result collapse of the country economy. Furthermore, we take China as another example. The growth rate of China GDP is 9.30% in 2011, the main force of the high growth GDP in China is export of good and services which mainly due to the low price or the low exchange rate of currency. Free floating currency will bring RMB
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