currency

effect-of-appreciation

Problems of a strong currency

A look at the impact of strong (overvalued) currency Readers Question: Why would a strong currency be bad for a country? If we consider a country like an individual, having a strong currency means the country can accumulate more assets and resources for its people, thereby increasing the value of its country.  As for the reasoning that it decreases competitiveness, if for example, it reduces tourism like in Switzerland, that just means that actual demand has reduced. This will naturally cause people to diversify into some other business,…

Money supply and the exchange rate

Readers Question: Does expansionary monetary policy, where money supply is increased, also cause a depreciation in the currency?  – Since there is a surplus of the currency in the foreign exchange market. Expansionary monetary policy means policies to increase demand in the economy. Expansionary monetary policy typically will involve: Lower interest rates – to make it cheaper to borrow and encourage both consumption and investment. Increasing the money supply, e.g. through quantitative easing – creating money electronically In many circumstances, an increase in the money supply could…

Problems of Overvalued Exchange Rate

Problems of Overvalued Exchange Rate

An overvalued exchange rate implies that a countries currency is too high for the state of the economy. An overvalued exchange rate means that the countries exports will be relatively expensive and imports cheaper. An overvalued exchange rate tends to depress domestic demand and encourage spending on imports. An overvalued exchange rate can also be measured by looking at purchasing power parity PPP. An overvalued exchange rate will mean goods are relatively more expensive in that country. (a more sophisticated…

How speculators gain profit from currency speculation

How speculators gain profit from currency speculation

Readers Question: Can you please explain how speculators can gain a profit from a speculative attack on currencies? A speculative attack on a currency occurs when ‘investors’ believe that the value of a currency is over-valued and therefore, they sell that currency in anticipation of it falling and buy another currency (e.g. sell their holdings of Pound Sterling and buy Euros). They make money by seeing the value of the currency they buy (e.g. Euros) increase. Also, to maximise profits, investors can engage in ‘short selling’. This is when an investor…

Devaluation of the Indian Rupee

Devaluation of the Indian Rupee

The Indian Rupee has fallen in value against a basket of currencies since independence in 1947. In recent years, the Indian Rupee has continued to depreciate in value. Indian Rupee value against US Dollar In 1990, you could buy $1 for 16 Indian Rupees. By 2013, the value of a Rupee had fallen, so that you would need 65 Indian Rupees to buy $1. Another way of thinking about it: In 1990 1 Indian Rupee = $0.06 In 2013 1 Indian Rupee =…

How to increase the value of a currency

How to increase the value of a currency

Summary. A look at policies a country can consider to increase the value of a currency. Readers Question: I was wondering, what are some of the policies and possibilities a country can use to increase the value of their currency? Specifically, countries who would be trying to “overthrow” the US dollar like China, India, Brazil, Russia etc. To increase the value of their currency, countries could try several policies. 1. Sell foreign exchange assets and buy their own currency China has over $1.4 trillion of US government bonds. If the Chinese sold these…

What happens to value of currency during recession?

What happens to value of currency during recession?

Readers Question: What will happen to the value of a currency during times of deep recession and high inflation? There is no hard and fast rule about what will happen to the value of a currency during a deep recession – though, a currency is likely to fall because country becomes a less attractive place to invest. For example, when the great recession started in 2008, the UK experienced a significant depreciation. The Pound Sterling fell over 25% from 2007 (before the…

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Foreign Currency Reserves

Readers Question: What is the main purpose of foreign reserves? Who decides what amount to be kept as reserve and how this reserve is financed? Could be please explain in detail? Definition of: Foreign Currency Reserves (Forex Reserves). This is the amount of foreign currency reserves that are held by the Central Bank of a country. In general use, foreign currency reserves also include gold and IMF reserves. Also, people may take into account liquid assets that can easily be converted into foreign currency. For example, Japan has just under $1,000 trillion…