Currency featuring Economy
Currency and Exchange rates:
Currency markets are the most liquid trading platform, where huge amount of trading take place among large banks, central banks, corporations, governments, currency speculators and other institutions. The prices at which one currency can be exchanged for other currencies are called Exchange Rates.Now the question arises, how much unit or units of any particular currency can be exchanged for another currency? Currency exchange rates can be determined broadly in two ways. The First one is Floating, in which case the rates change continually based on number of economic factors like interest rates, inflation, economic growth etc. Secondly exchange rate can be pegged (or fixed) to another currency, in which case currency still float, but follow the movement of the currency in which they have fixed or pegged.
Calculated price in foreign currency rate is vital when selecting investment in other country with different currency. For example’ for European investor, knowing the Euro to Dollar exchange rate help when deciding US investments. The fall in Euro could increase the value of foreign investments over time, like an increasing Euro could hurt the value of your foreign investments and returns on them. That’s why during present financial crisis International investment companies collect their liquidity from the developing economies and left for their parent countries. Which resulted into sharp fall in developing capital markets.
United States Dollar: Rising Currency Concern
In US markets’ Dollar surpassed all time high levels in comparison to different currencies worldwide. US dollar also rising in part due to unwind of dollar-denominated debt that international financial institutions are unable to refinance in this credit environment. This is one reason that the US Fed has lent unlimited funds in US Dollars to other Central Banks including Swiss and European Central Bank.
Rising Dollar: The US Dollar rising against everything and that mean some major losses at funds that were betting against the dollar. The funds better known as hedge funds secure the international investments in different currencies
Major US exporter like China has the very big surplus of US dollars that consistently lost its value before crisis but now reversed its pattern towards all time highs due to the liquidity shortage.
Dollar Fears: Currency evaluation becomes difficult by the fact that we presently have a worldwide economy now, any future projection has affected by a wide variety of factors like the influence from major exporter like China.
Recently China shifted its policy for investing dollar reserves into forex and started investing internally with the announced more than a half of a trillion-dollar internal stimulus package. That turned out as negative news for the U.S. government bond market. US need to sell more debt than ever as the biggest buyer left the trading floor.
Further let’s assume if China decides any day to dump the billions of U.S. dollars it is currently holding as big reserves, increasing the huge quantity of available US dollar reserves overnight, simply because they decided they would rather hold other currencies like Euro or even Japanese Yen.
Currency exchange rates have a striking impact on the economy of a country and economic life of their residents. The recent surge in US dollar is an apt example. Considered as most liberalized currency US Dollar not long touched its lower levels and comes out presently dominating most of the world currencies touching its all time highs. Traditionally this move considered on the theory that economy and currency follows the same path, as increase in currency reflects rising economy and vice versa. But the real world now is more influenced by global economy, particularly from the bulk traders.
No doubt that the increase in dollar improves the ability to buy more with the same money, but also the abundance of cheap imported goods, make it tough for the local manufacturer and industrial suppliers to survive with very low margins left due to intense competition. Low labor cost and very less cost of production in the bulk exporting countries left no choice for local businesses to think about competing with them. As already increasing unemployment data there going a silent suppression of the manufacturing sector, the picture will be more clearer in the coming times with the actual data.
While concluding it can be said that improving currency may or may not featured the true picture of economy. This obviously is the reason behind the US markets nervousness despite increasing dollar. Now the manufacturing sector looking out for policy relief, if any’ before it gets too late as in the case of investment bankers. The companies focused and earn more revenue from the exports can be interesting to watch out for.
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