C4 - 4
ⅡExchange Rate Equilibrium
• An exchange rate represents the price of a
currency, which is determined by the demand for that currency relative to the supply for that currency.
C4 - 18
Exchange rate between foreign currency and the dollar
example
• Assume that Morgan Co., a U.S.-based MNC,
commonly purchase supplies from Venezuela bolivar and the Japanese yen. Morgan’s financial analysts have developed the following one-year projections for economic conditions:
C4 - 21
Ⅳ Anticipated Exchange Rates Speculation
• Many commercial banks attempt to
Strengthened
C4 - 16
Factors that Influence Exchange Rates
(6)Interaction of Factors
• Trade-related factors and financial factors
sometimes interact. Exchange rate movements may be simultaneously affected by these factors..
C4 - 20
Tips
• Capital flows have become larger over
time and can easily overwhelm trade flows. For this reason, the relationship between the factors that affect trade and exchange rates is not always as strong as one might expect.
rate is determined; and
• To examine the factors that affect the
equilibrium exchange rate.
C4 - 2
ⅠMeasuring Exchange Rate Moe rate measures the value of
S1 S0 D1 D0 Quantity of £
alue of £ r1 r0
U.S. inflation U.S. demand for British goods, and hence £. British desire for U.S. goods, and hence the supply of £.
Chapter
4
Exchange Rate Determination
South-Western/Thomson Learning © 2003
Chapter Objectives
• To explain how exchange rate movements
are measured;
• To explain how the equilibrium exchange
C4 - 8
Factors that Influence Exchange Rates
Real Interest Rates
• A relatively high interest rate may actually
reflect expectations of relatively high inflation, which discourages foreign investment.
C4 - 9
Factors that Influence Exchange Rates
Relative Interest Rates
•
real nominal interest interest – inflation rate rate rate Fisher effect.
• This relationship is sometimes called the
C4 - 7
Factors that Influence Exchange Rates
(2)Relative Interest Rates
S0 S1 D0 D1 Quantity of £
alue of £ r0 r1
U.S. interest rates U.S. demand for British bank deposits, and hence £. British desire for U.S. bank deposits, and hence the supply of £.
C4 - 3
Online Application
• For the latest exchange rates, visit:
¤ / ¤ /
¤ /
¤ /
one currency in units of another currency.
• When a currency declines in value, it is
said to depreciate(贬值). When it increases in value, it is said to appreciate(升值）.
C4 - 17
How Factors Can Affect Exchange Rates
Trade-Related Factors 1. Inflation Differential 2. Income Differential 3. Gov’t Trade Restrictions Financial Factors 1. Interest Rate Differential 2. Capital Flow Restrictions U.S. demand for foreign goods, i.e. demand for foreign currency Foreign demand for U.S. goods, i.e. supply of foreign currency U.S. demand for foreign securities, i.e. demand for foreign currency Foreign demand for U.S. securities, i.e. supply of foreign currency
• 2)assume that U.S. and Japan conduct
very little international trade but frequently engage in capital flow transactions. how about the future value of Japanese yen?
Value of £ $1.60 $1.55 $1.50 S: Supply of £
equilibrium exchange rate
D: Demand for £ Quantity of £
C4 - 6
Ⅲ Factors that Influence Exchange Rates
(1)Relative Inflation Rates
C4 - 10
Factors that Influence Exchange Rates
(3)Relative Income Levels
£/$ r1 r0
U.S. income level U.S. demand for S0 ,S1 British goods, and hence £. D1 No expected change for D0 the supply of £.
Expectations Signal 1.Poor U.S. economic indicators
Impact on $ Weakened
2.Fed chairman suggests Fed is Strengthened unlikely to cut U.S. interest rates 3.A possible decline in German Strengthened interest rates 4.Central banks expected to Weakened intervene to boost the euro
Quantity of £
C4 - 11
Factors that Influence Exchange Rates
(4)Government Controls
• Governments may influence the
equilibrium exchange rate by: ¤ imposing foreign exchange barriers, ¤ imposing foreign trade barriers, ¤ Intervening（干预） in the foreign exchange market, and ¤ affecting macro variables such as inflation, interest rates, and income levels.
• • • •
factor Change in Inflation rate