Exchange Rate Movements

Central banks intervene in foreign exchange markets by “influencing the monetary funds transfer rate of a nation’s currency” with the purpose of building reserves, keeping the exchange rate stable, to correct imbalances, to avoid volatility and keep credibility. It implies changing the value of a currency against another one. It creates demand or supply of a currency by buying or selling the country’s currency in the foreign exchange market. (Foreign Exchange Intervention)

Before we look at these forces, we should sketch out how exchange rate movements affect a nation 's trading relationships with other nations. A higher currency makes a country 's exports more expensive and imports cheaper in foreign markets; a lower currency makes a country 's exports cheaper and its imports more expensive in foreign markets. A higher exchange rate can be expected to lower the country 's balance of trade, while a lower exchange rate would increase it.

Exchange rates play a pivotal role in the relationships between individual economies and the global economy. Almost all financial flows are processed through the exchange rate, as a result the movements and fluctuations of the exchange have a significant impact on international competitiveness, trade flows, investment decisions and many other factors within the economy. Due to the increasing globalisation of the world economy, trade and financial flows are becoming more accessible

Currency fluctuations are the result of floating exchange rates. This can a negative or positive outcome for the company. This is mainly due to supply and demand factors in each individual market. In many instances nations can adjust their exchange rates. A common fallacy that most people harbor is that a strong domestic currency is a good thing (“The effects of currency fluctuations on the economy, “2013) this might seem like a good thing, but it can hurt the company in the long run.

With no need to defend an exchange rate and no need to thwart an externally sourced currency crisis and no need to defend against speculators, there would be no need for the Central Bank of those three countries to

1. High capital mobility is forcing emerging market nations to choose between free-floating regimes and currency board or dollarization regimes. What are the main outcomes of each of these regimes from the perspective of emerging market nations?

Arguments against flexible exchange rates include the arguments that they cause uncertainty, they inhibit international trade and that they allow destabilizing speculation. Arguments against fixed rates include that they cause uncertainty, they inhibit international trade and they allow destabilizing speculation. Contrast the situation in one country with a fixed exchange rate with one country that has a floating rate and explain the impact of the fixed and floating rates.

Q5b) From the perspective of the citizens, devaluing the currency would be disastrous as the citizens assets are in that currency, as well as their life savings. For example, in Iraq, when the currency collapsed, people’s savings were

With a free floating exchange rate, the value of the currency is simply determined by supply and demand of the market. The Central Bank cannot set a target exchange rate and intervene in the market exchange rate for this purpose.

The graph describes the foreign exchange reserves in China which expressed a dramatic increase between 1985 and 2006. Due to the Chinese economy development, an increasing number of foreign investments are keen to enter the Chinese capital market. Moreover, a significant number of Chinese corporations would gain more opportunities to cooperate with foreign companies and learn from each other. It also provides them enough foreign capital to invest in the international markets. But a large amount of foreign capital holding flow into China that may pose threat to domestic companies, namely the foreign companies may rob the domestic companies’ market share for their future development. So the Chinese government may consider building a security limitation of foreign exchange reserves.

Furthermore, mechanisms to allow the economy to absorb shocks that a freely floating currency entails have been the subject of recent economic discussions. (BSP, 2008)

It seems that with flexible exchange rates in China, it feels like two steps forward, one step backwards. While they are indeed moving toward a floating exchange rate, it is a slow going process filled with exhaustive government control and regulation.

In most of the cases developed countries (e.g Norway, England, united kingdom, Switzerland, etcetera) tend to have a very strong currencies relative to the under developed or developing countries (e.g Mozambique, Rwanda, Angola, and etcetera) and also have a good currency stabilization, this essay shall explain why that is the case.

A fixed exchange rate regime will offer an economy greater stability in international prices and therefore encourage trade. Additionally, for developing countries a fixed rate will assist in promoting institutional discipline as the country will adopt restrictive monetary and fiscal policies that foster an anti-inflationary environment. A significant weakness of a fixed rate is that it is subject to destabilizing speculative attacks which could lead to financial meltdowns and devastating economic contractions. A floating exchange rate regime allows central banks to combat macroeconomic factors such as unemployment, inflation, and interest rates without having to worry about the effect on exchange rates. However, developing countries whose economies depend on trade will be reluctant to allow their exchange rates to fluctuate freely.

One of the key factor to manage the inflation rate effectively is through monetary policy. Currency stability allow investors to develop long term strategy and minimize exchange rate risk. As Monetary Authority of Singapore(2014) states that adopting the management of exchange rate as it is ideal in terms of the small economy of singapore where it is easier to manage through direct intervention within the foreign market. It is seen as an effective mitigation to curb the high inflation rate for singapore economy