session 19
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Session 19. What Determines Exchange Rate ?. 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. - PowerPoint PPT PresentationTRANSCRIPT
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Session 19What Determines Exchange Rate ?
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Movements of Exchange Rate1. Long-term Trends
The movement of exchange rate over the entire period.
2. Medium-term Trends
The movement of exchange rate over periods of severalyears. 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 evenminute to minute.)
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Exchange Rates in the Short-runThis 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
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The Role of Interest Rates
ThaiBond
Interest = 10 %Exchange
Money
MalaysiaBond
Interest = 5%
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)
What happen to Malaysia currency ?
The value of “Malaysia” currency will depreciate.
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The Role of the Expected Future Spot Exchange Rate
Current Spot RateSingapore
1 USD / 25 SGDSingapore
$ 1 USD / 20 SGD
Hong Kong1 USD / 25 HKD
Hong Kong1 USD/ 30 HKD
Expected FutureSpot Rate
High Demand for the “Singapore” currency will occur.
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”)
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Exchange Rates in the Long-runPrice Level
U.S.
Suppose : $1 = £1 (at the outset)
U.K.
= £1
= $1 > $1
> £1
Export
Export
(i.e., + transport cost, tariff, bribe, and etc)
Continue on the next slide
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U.S.
Importing Price > £1(Let’s say “£1 + XXX”)
U.K.
£1 + XXX £1Bank
$1 + XXX
£1 + XXX
Afterward
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Suppose : 25 Bath = Australia $1 = U.S. $1 (at the outset)
= Australia $1
= U.S. $1
75 Baht
50 Baht
ThailandAustralia
U.S.
75 baht/ $1AUS
50 baht/ $1US
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Inflation Rate
U.S. Thai
= $1 = 25 BahtExport
= $2
Inflation = 50 Baht
Thai people buy less
The market system will impact on the exchange rate.
Countries with relatively high inflation rates have currencies whose valuestend to depreciate in the foreign exchange market.(i.e., from “1 dollar/25 baht” to “1 dollar/15 bath”)
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U.S. Thai
= $1 = 25 BahtExport
= $ 0.5
Deflation = 12.5 Baht
Thai people buy more
The market system will impact on the exchange rate.
Countries with relatively low inflation rates have currencies whose valuestend to appreciate in the foreign exchange market.(i.e., from “1 dollar/25 baht” to “1 dollar/30 bath”)
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10 baht/1 dollars
11 baht/1 dollars
The values of baht tend to depreciate.
15 baht /1 dollars
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