Exchange Rates Flashcards
What is meant by exchange rate?
The value of a currency measured against another currency
What determines the exchange rate?
For a floating exchange rate, as is the case for the UK, it is determined by market forces
How do interest rates affect the exchange rate?
Global investors get the best return on their money by moving their funds into a country with high interest rates, this is called ‘hot money flows’. Increasing exchange rate will increase the demand for the currency so it appreciates
How do imports and exports affect the exchange rate?
When a good is imported it must be paid in the currency of the exporting country, therefore more of the importing currency is supplied thus depreciating it. Vice versa there is more demand for the exporting currency which appreciates it.
How does speculation affect the interest rate?
FOREX traders speculate on how well they think a currency will perform in the future by buying and selling currencies. E.g. if a trader believes a country will have poor economics performance they will sell it’s currency shifting supply out, depreciating it
How does manipulation affect the exchange rate?
Countries can manipulate their exchange rate to impact their trade balance. For example, they could decrease interest rates to disincentives hot money flows and decrease its demand so depreciate it. Furthermore a central bank could purchase assets denominated in another currency, strengthening that currency
How does the exchange rate affect the cost of imported consumer goods?
