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Simple View of Exchange Rate Determination

Simple View of Exchange Rate Determination. EUR exchange rate against the dollar: EUR value in USD. Source: FRB, NY. The ForEx market. Supply of the USD Imports to the US Goods (trade) Services (tourism) US investment abroad Foreign Financial Markets Direct investment abroad

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Simple View of Exchange Rate Determination

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  1. Simple View of Exchange Rate Determination

  2. EUR exchange rate against the dollar: EUR value in USD

  3. Source: FRB, NY

  4. The 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

  5. The 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

  6. The market for USD in the 90’s P of USD Influx of investment stimulated Demand D S Increase in imports stimulated Supply Demand Effect Dominated (thus positively effecting consumers’ standard of living)

  7. The 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

  8. Should We Be Concerned With The Fluctuating Dollar? • TRADE and Currency Fluctuations • Price Changes • Standard of Living • Commodity Prices

  9. Can the Government Influence the Value of the Dollar? • Monetary Policy • Changes in Interest Rate and Investment Flow • Fiscal Policy • Borrowing leading to changes in Interest Rate

  10. Currency Trade and Exchange Regime 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

  11. The 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)

  12. Balance of Payments • Current Account • Trade • Income flow • Financial Account • Investment Flow • Paying for Foreign Goods with Domestic Financial • Assets – the US Example • (US BoP)

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