Ch 9 ‘Money, Exchange Rates, and Currency Areas’
Introduction to how exchange rates can fluctuate
The floating exchange rates cause fluctuations in currency from different countries. Many factors influence the exchange rates of a countries currency. The most significant factor is the supply and demand for that currency. If a country has a high amount of money in circulation, then the demand will decrease as compared when the amounts are low.
Recently, many countries currency rates are fluctuating now and then. Some currencies have recorded very low exchange rates as a result. Due to the constant rates of fluctuation, many countries currency lose their value while others gain more value. Increase in the demand of a countries currency will lead to a subsequent increase in its currency rates.
The government of a country is responsible for deciding the interest rates in the country’s currency. If they want to reduce the exchange rates, they will sell their treasury bonds to the people this will decrease the money in circulation, consequently leading to an increase in demand of a countries currency. If they want to weaken the countries currency, they will buy securities from the people this will ensure the amount of money in circulation is high this will ensure that people borrow more as the rates are low. The supply of the currency will portray the currency value or rates of a country.
The currency effect on trade
The currency fluctuations affect the trade between individuals dealing with different currencies. For the people whose currency is low in demand, they may end up being paid more for their services as compared to those whose currency is high demand. The reason for this view is that when the currency of a country is more in circulation, it may lead to inflation.
The implication of currency fluctuations on businesses is sometimes favourable while for others, it’s negative. For instance, in a country whose currency has jumped to its lowest, the businesses may sell their products at low prices as compared to the times when the currency rates were normal.
The positive side of the fluctuation comes when your currency is in low supply this makes your currency superior over other currencies giving your business the upper hand if you deal with currencies that are low in value. Your products may increase in price as you get a good deal out of it.
The other significant impact for business is that the cost for importing from countries affected by the fluctuations are prone to be low as you deal with a higher valued currency. For example, the Indian rupee is weaker than the US dollar this makes sense if we import from India s we will only pay a few dollars and get the job done well.