AOF Business in a Global Economy Unit 4, Lesson 7 Currency Exchange Fluctuations Copyright © 2009–2012 National Academy Foundation. All rights reserved.
A currency’s value is determined by supply and demand Floating Exchange Rate: allowed to vary against other currencies as determined by market forces Fixed Exchange Rate: pegged to another currency, group of currencies, or item of value such as gold What might the benefits of a fixed exchange rate be? Copyright © 2009–2011 National Academy Foundation. All rights reserved.
Stable politics tend to lead to stable currencies Political events that affect currency values can be: Internalin the country Regionalin the neighboring area Internationalall over the globe 5 Most Traded Currencies 1 US dollar 2 Euro 3 Japanese yen 4 British pound 5 Swiss franc Copyright © 2009–2011 National Academy Foundation. All rights reserved.
Economic policies and trends influence exchange rates Economic Policy: Interest rates Fiscal policy Economic Conditions: Budget deficit or surplus Balance of trade Inflation rates GDP/growth rate How might a nation’s GDP influence the value of its currency? Copyright © 2009–2011 National Academy Foundation. All rights reserved.
Market psychology also affects exchange rates FX traders are human beings, and are affected by emotions and rumors. In unstable times, traders seek stable currencies. Rumors and expectations can raise or lower values. Which sort of research would you do if you were an FX trader? Copyright © 2009–2011 National Academy Foundation. All rights reserved.
Governments care about exchange rates Exchange rates affect a country’s: Price of imported goods Tourism Long-term business contracts Trade balance STRONG CURRENCY WEAK CURRENCY Imports up, exports down Exports up, imports down Tourism down Tourism up Foreign purchasing power up Foreign purchasing power down Risk of trade deficit Risk of trade surplus Copyright © 2009–2011 National Academy Foundation. All rights reserved.
Successful FX traders stay informed Exchange rates are affected by many variable but often foreseeable factors, such as: Continually changing economic trends Changes in governments or governmental policies The expectations of traders Current events What are some other factors that might affect currency exchange rates?