How to increase the value of a currency

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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, …

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Problems of a strong currency

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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 …

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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 …

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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 …

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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 …

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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 …

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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 start of the great recession) to July 2009

But the Euro and Dollar were less affected by the great recession.

U.S._Dollar_IndexThe US dollar index (which shows the value of the US dollar against a trade-weighted basket of other currencies, e.g. Euro and Yen) has fluctuated but overall has remained at similar value to the start of the recession.

Note in early 1980, the US went into recession, but during this period the value of the Dollar rose.

It was a similar experience in the UK, in the 1980s, In 1980,  there was a rapid appreciation in Sterling (which was one factor contributing to the recession of 1980/81.)

Economic theory behind the value of a currency in recession

Suppose one country, e.g. the UK, enters a deeper recession than all its other competitors. How might we expect the currency to behave?

Recession and interest rates. If the UK enters a recession, then we would expect UK interest rates to fall compared to other countries. This would make the UK less attractive for investors to save money. Hot money flows are likely to leave the UK and move to countries with higher interest rates. If people move money out of the UK, they will sell Pounds and buy other currencies, causing a fall in the value of Sterling. Therefore, in theory, we might expect a recession to cause a fall in the value of the currency.

Evaluation

1. In a recession, inflation is likely to fall. Lower inflation will help the country become more competitive, and this may increase demand for the currency causing it to rise.

2. Many factors affect the value of a currency. For example, if the UK had a large current account deficit, then we might expect this trade deficit to put downward pressure on the currency. The fall in the value of Sterling in 2008 was partly related to the UK’s trade deficit and lack of competitiveness. However, if a country like Germany entered a recession, they may be less downward pressure on their currency (the Euro) because Germany has a large current account surplus.

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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 …

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