The exchange rate expresses the national currency's quotation in respect to foreign ones. For example, if one US dollar is worth 10 000 Japanese Yen, then the exchange rate of dollar is 10 000 Yen. If something costs 30 000 Yen, it automatically costs 3 US dollars as a matter of accountancy. Going on with fictitious numbers, a Japan GDP of 8 million Yen would then be worth 800 Dollars.
Thus, the exchange rate is a conversion factor, a multiplier or a ratio, depending on the direction of conversion.
In a slightly different perspective, the exchange rate is a price. If the exchange rate can freely move, the exchange rate may turn out to be the fastest moving price in the economy, bringing together all the foreign goods with it.
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Wednesday, May 12, 2010
Tuesday, May 4, 2010
Interest Rates On Treasury Bonds
Interest rates on Treasury bonds should influence the decision of foreigners to purchase currency in order to buy them. In this case, higher interest rates attracts capital from abroad and the currency should appreciate. Decisive would be the difference between domestic and foreign interest rates, thus a reduction in interest rates abroad would have the same effects.
Similarly other fixed-interest financial instruments could be object of the same dynamics. Accordingly, an increase of domestic interest rates by the central bank is usually consider a way to "defend" the currency.
Nonetheless, it may happen that foregners rather buy shares instead of Treasury bonds. If this were the strongest component of currency demand, then an increase of interest rate may even provoke the opposite results, since an increase of interest rate quite often depresses the stock market, favouring a tide of share sales by foreigners.
In the same "inversal" direction might foreign direct investments work. A restrictive monetary policy usually depresses the growth perspective of the economy. If FDI are mainly attracted by sales perspectives and they constitute a large component of capital flows, then FDI inflow might stop and the currency weaken.
Needless to say, those conditions are quite restrictive and not so usually met.
As a temporary conclusion, interest rates should have an important impact on exchange rate but one has to be careful to check additional conditions.
Similarly other fixed-interest financial instruments could be object of the same dynamics. Accordingly, an increase of domestic interest rates by the central bank is usually consider a way to "defend" the currency.
Nonetheless, it may happen that foregners rather buy shares instead of Treasury bonds. If this were the strongest component of currency demand, then an increase of interest rate may even provoke the opposite results, since an increase of interest rate quite often depresses the stock market, favouring a tide of share sales by foreigners.
In the same "inversal" direction might foreign direct investments work. A restrictive monetary policy usually depresses the growth perspective of the economy. If FDI are mainly attracted by sales perspectives and they constitute a large component of capital flows, then FDI inflow might stop and the currency weaken.
Needless to say, those conditions are quite restrictive and not so usually met.
As a temporary conclusion, interest rates should have an important impact on exchange rate but one has to be careful to check additional conditions.
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