1. International Economics What Determines Exchange Rate ?
16/11/61
Session 19
What Determines Exchange Rate ?
Aj. Noom tel

2. Movements of Exchange Rate
1. Long-term Trends
The movement of exchange rate over the entire period.
2. Medium-term Trends
The movement of exchange rate over periods of several years. These are sometimes counter to the longer trends.
3. Short-term Variability
The movement of exchange rate over short periods. These are the exchange rates from month to month (and indeed, from day to day , hour to hour, and even minute to minute.)

4. Exchange Rates in the Short-run
This depends on the demands and supplies of assets denominated in different currencies.
1. The basic return on the bond itself (the interest rate)
2. The expected gain and loss on the currency exchanges

5. The Role of Interest Rates
Malaysia
What happen to Malaysia currency ?
Bond
Interest = 5%
The value of “Malaysia” currency will depreciate.
Thai
Exchange Money
Bond
Interest = 10 %
High Demand for the “Thai” currency will occur.
The amount of “Thai” currency will be reduced from the system.
The value of “Thai” currency will appreciate. ( i.e. from 1 dollar/25 baht to 1 dollar/24)

6. The Role of the Expected Future Spot Exchange Rate**
Current Spot Rate
Expected Future Spot Rate
Singapore
1 USD / 25 SGD
Singapore
$ 1 USD / 30 SGD
High Demand for the “Singapore” currency will occur.
Hong Kong
1 USD / 25 HKD
Hong Kong
1 USD/ 20 HKD
The amount of “Singapore” currency will be reduced from the system.
The value of “Singapore” currency will appreciate. ( i.e. from “1 USD /25 SGD” to “1 USD/24 SGD”)

8. Exchange Rates in the Long-run
Price Level
(i.e., + transport cost, tariff, bribe, and etc)
Suppose : $1 = £1 (at the outset)
U.S.
U.K.
= $1
Export
> $1
Continue on the next slide
Export
= £1
> £1

9. U.S. Afterward U.K. $1 + XXX £1 + XXX £1 £1 + XXX
Importing Price > £1
(Let’s say “£1 + XXX”)
Bank
$1 + XXX
U.K.
£1 + XXX £1
£1 + XXX

10. Thailand 75 baht/ $1AUS Australia U.S. 50 baht/ $1US
Suppose : 25 Bath = Australia $1 = U.S. $1 (at the outset)
75 baht/ $1AUS
Australia
Thailand
= Australia $1
75 Baht
U.S.
50 Baht
50 baht/ $1US
= U.S. $1

11. The market system will impact on the exchange rate.
Inflation Rate
U.S.
Thai
= $1
Export
= 25 Baht
= 50 Baht
Inflation
Thai people buy less
= $2
The market system will impact on the exchange rate.
Countries with relatively high inflation rates have currencies whose values tend to depreciate in the foreign exchange market. (i.e., from “1 dollar/25 baht” to “1 dollar/15 bath”)

12. The market system will impact on the exchange rate.
U.S.
Thai
= $1
Export
= 25 Baht
= 12.5 Baht
Deflation
Thai people buy more
= $ 0.5
The market system will impact on the exchange rate.
Countries with relatively low inflation rates have currencies whose values tend to appreciate in the foreign exchange market. (i.e., from “1 dollar/25 baht” to “1 dollar/30 bath”)

13. 15 baht /1 dollars
11 baht/1 dollars
10 baht/1 dollars
The values of baht tend to depreciate.