1 simple view of exchange rate determination. 2 eur exchange rate against the dollar: eur value in...
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Simple View of Exchange Rate Simple View of Exchange Rate DeterminationDetermination
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Foreign Exchange Rates Series: EUR (European Monetary Union Euro) 10 AM
00.20.40.60.8
11.21.41.6
1/4/
1999
7/4/
1999
1/4/
2000
7/4/
2000
1/4/
2001
7/4/
2001
1/4/
2002
7/4/
2002
1/4/
2003
7/4/
2003
1/4/
2004
7/4/
2004
1/4/
2005
7/4/
2005
1/4/
2006
EUR exchange rate against the dollar: EUR value in USD
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USD exhcnage rate against the Canadian Dollar
00.20.40.60.8
11.21.41.61.8
1/2/
1997
1/2/
1998
1/2/
1999
1/2/
2000
1/2/
2001
1/2/
2002
1/2/
2003
1/2/
2004
1/2/
2005
1/2/
2006
Source: FRB, NY
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The ForEx marketThe ForEx market
Supply of the USD Imports to the US
Goods (trade) Services (tourism)
US investment abroad Foreign Financial
Markets Direct investment abroad
Central Banks Speculation
Demand for the USD US Exports
Goods Services (tourism)
Foreign Investment into US US Financial markets Direct investment
Central Banks Speculation
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The Interesting 90’sThe Interesting 90’s 1991-92: Collapse of the USSR Block, beginning of the Transitional
Recession in Eastern Europe 1994 Mexican Currency Crisis 1991(2)-95 The Balkan Wars 1998 Recession in Japan 1997 (July) Beginning of the Asian Financial Crisis 1998 major Rouble Crisis
US ECONOMY
average % rates
1992-2000 2001-2004
Real GDP 3.7 2.5
Gross Domestic Private Investment 8.7 1.8
Non-Residential Investment 9.1 0.2
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The market for USD in the The market for USD in the 90’s90’s
D S
Influx of investment stimulated Demand
Increase in imports stimulated Supply
Demand Effect Dominated(thus positively effecting consumers’ standard of living)
P of USD
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The post 90’s eraThe post 90’s era United Europe
10 New Countries Entered the Union on May 1st of 2004, bringing the total number of member states to 25, with combined population of over 430 million (US population is 293 million).
Growth in Russia and China nearing double digits Emerging Economies of Brazil and India Threat of Terrorism to the US Continuous Growth in US Trade Deficit
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Should We Be Concerned With The Should We Be Concerned With The Fluctuating Dollar?Fluctuating Dollar?
TRADE and Currency Fluctuations Price Changes Standard of Living Commodity Prices
Date USD per EURO USD Price of OIL Euro Price of OIL
March 1, 2002 0.8652 22.40 25.89
March 3, 2003 1.0835 35.88 33.11
March 1, 2004 1.2431 36.86 29.65
March 1, 2005 1.3189 51.68 39.18
% change over the period 52.44 130.71 51.35
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Can the Government Influence the Can the Government Influence the Value of the Dollar?Value of the Dollar?
Monetary Policy Changes in Interest Rate and Investment
Flow
Fiscal Policy Borrowing leading to changes in Interest
Rate
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Currency Trade and Exchange Currency Trade and Exchange RegimeRegime
Floating Exchange Rate Regime Currency Trade by Central Banks
Fixed Exchange Rate Regime Does Recent Dollar Depreciation Impact
the Trade Deficit with CHINA? Price Stabilization and Fixed Exchange
Rate Regime Risk to CB
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The BIG pictureThe BIG picture
Rise in Imports Increase in Supply Depreciation Rise in Exports Increase in Demand Appreciation Influx of Investment Increase in Demand Appreciation Outflow of Investment Increase in Supply Depreciation
BALANCE OF PAYMENTS – An Economy’s International Balance Sheet (www.bea.gov)
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Balance of PaymentsBalance of Payments
Current Account Trade Income flow
Financial Account Investment Flow
• Paying for Foreign Goods with Domestic Financial Assets – the US Example(US BoP)