Exchange Rate Movements - 1376 Words

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 va lue 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 RMBShow MoreRelatedWhy Is It so Difficult to Forecast Exchange Rate Movements?1034 Words   |  5 Pagesstability. It is not difficult to see the exchange rate fluctuations are widely regarded as damaging. As the movements of the exchange rate have s ignificant and large effects on the trade balance, resource allocation, domestic prices, interest rate, national income and other key economic variables. Then can exchange rate movements be predicted by these fundamental economic variables? Economists have long taken the view that economic fundamentals determine exchange rates. Nevertheless, in the early 1970sRead MoreThe Link between Trade Performances and Exchange Rate Movements799 Words   |  3 PagesThe link between trade performances and exchange rate movements has been the matter of many practical studies. The literature review explains that the set of results, often in similar countries, might stem from practical proof being removed from diverse time periods and not the same methodologies. First, it clarifies whether exchange rate instability impedes trade flows. Second, it shows if the exchange rate depreciation develops the trade balance (J-curve effect). Wei (1999) evaluated a board ofRead MoreHow The Monetary Policies Affect The Exchange Rate Movement2097 Words   |  9 Pagesrelationships between the exchange rate and various economic fundamental variables. About econometric software, where it is used is Stata. 4.1 Aims and objectives Due to the Britain perform double tight fiscal and monetary policy is very firm. Control interest rate and stabilize the economy have played a certain impact on the sterling. For this project, the aim study is to find the answers for the main question, which is how the monetary policies affect the exchange rate movement. 4.2 Theoretical underpinningRead MoreThe Theory Of An Nominal Price Of The Existence Long Run Deviations From Ppp939 Words   |  4 PagesDue to the fact that short-term nominal price rigidities, the movements of nominal exchange rate result in movements of real exchanger rate in the short-run. Balassa- Samuelson model is the first and most popular model for rationalizing the existence long-run deviations from PPP, which depends upon the assumption that the equilibrium exchange rate is determined by the traded good prices. 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Specifically, 110 questionnaires were return from 1940 surveysRead MoreExchange Rate Between Countries Determines One Currency s Strength1305 Words   |  6 PagesLewis Hodge International Finance Euro/USD Exchange rate December 7, 2015 Exchange Rate The exchange rate between countries determines one currency’s strength in comparison to another. These rates also oversee the economic growth and the currency purchasing power of countries. Therefore, exchange rates are vital in ensuring that one country can maintain its value versus the US dollar which is the most dominant currency. Currently, the Euro/USD exchange rate is at 1.0666. This paper strives to giveRead MoreBusiness World and Exchange Rate Problems1656 Words   |  7 Pagesunderstand the problem of exchange rate. In order to answer to this problematic, various topics will be analysed. First, the concept of exchange rate will be defined to understand well the topic, then a summary of the movements of the four most used currencies, Dollar, Euro, GBP and Yen and theirs exchange rates over one year. In a second part, the main factors which play a huge role in the fluctuation will be explain and, more precisely, an explanation on the movement that appeared on the graph Read MoreInflation and Currency Risk644 Words   |  3 Pagesdecrease in value at some rate, and does so whether the money is invested or not. Malaysia is part of the worldwide emerging market where the country aims to achieve the status of a developed country by the year 2020, however, the increase in inflation and currency risk may effect that vision from happening. As inflation and currency plays a major role in the economic world. The performance of a stock market is usually associated with the movements in the exchange rate because of its influence onRead MoreThe Decline Of Australian Dollar Against The Us Dollar1231 Words   |  5 Pagescut its rate to 1.5% before March 2016 to deal with lower GDP and low domestic demand that is increasing unemployment. Mining investment has slowed down which reduced the value of iron ore causing Capital imports to fall in Australia. If the dollar declines too far then Australia’s import will be reduced and this is difficult for businesses. Another nail in the coffin for Australian economy is the plan to raise the rates of UK and US which could further decline the value of AUD. b) â€Å"Exchange rateRead MoreForeign Exchange Rate Sensitivity and Stock Price1702 Words   |  7 PagesFOREIGN EXCHANGE RATE SENSITIVITY AND STOCK PRICE : ESTIMATING ECONOMIC EXPOSURE OF TURKISH COMPANIES INTRODUCTION Variability in exchange rate is a major source of macroeconomic uncertainity affecting firms. After the 1970 s, the rapid expansion in international trade and adoption of floating exchange rate regimes by many countries led to increase exchange rate volatility. The firm s exposure to exchange rate risk increased. In the literature three types of exposure under floating exchange rate