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Simple View of Exchange Rate
Determination
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EUR exchange rate against the dollar: EUR value in USD
Foreign Exchange Rates Series: EUR (European
Monetary Union Euro) 10 AM
1/4/2006
7/4/2005
1/4/2005
7/4/2004
1/4/2004
7/4/2003
1/4/2003
7/4/2002
1/4/2002
7/4/2001
1/4/2001
7/4/2000
1/4/2000
7/4/1999
1/4/1999
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
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USD exhcnage rate against the Canadian Dollar
Source: FRB, NY
1/2/2006
1/2/2005
1/2/2004
1/2/2003
1/2/2002
1/2/2001
1/2/2000
1/2/1999
1/2/1998
1/2/1997
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
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The ForEx market
 Supply of the USD
 Imports to the US
 Goods (trade)
 Services (tourism)
 US investment abroad
 Foreign Financial
Markets
 Direct investment abroad
 Central Banks
 Speculation
 Demand for the USD
 US Exports
 Goods
 Services (tourism)
 Foreign Investment into
US
 US Financial markets
 Direct investment
 Central Banks
 Speculation
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The Interesting 90’s
 1991-92: Collapse of the USSR Block, beginning of the Transitional
Recession in Eastern Europe
 1994 Mexican Currency Crisis
 1991(2)-95 The Balkan Wars
 1998 Recession in Japan
 1997 (July) Beginning of the Asian Financial Crisis
 1998 major Rouble Crisis
US ECONOMY
average % rates
1992-2000
2001-2004
Real GDP
3.7
2.5
Gross Domestic Private
Investment
8.7
1.8
Non-Residential Investment
9.1
0.2
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P of USD
The market for USD in the
90’s
Influx of investment stimulated Demand
D
S
Increase in imports stimulated Supply
Demand Effect Dominated
(thus positively effecting consumers’
standard of living)
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The post 90’s era
 United Europe
 10 New Countries Entered the Union on May 1st of
2004, bringing the total number of member states to 25,
with combined population of over 430 million (US
population is 293 million).




Growth in Russia and China nearing double digits
Emerging Economies of Brazil and India
Threat of Terrorism to the US
Continuous Growth in US Trade Deficit
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Should We Be Concerned With The
Fluctuating Dollar?
 TRADE and Currency Fluctuations
 Price Changes
 Standard of Living
 Commodity Prices
Date
USD per EURO
USD Price of OIL
Euro Price of OIL
March 1, 2002
0.8652
22.40
25.89
March 3, 2003
1.0835
35.88
33.11
March 1, 2004
1.2431
36.86
29.65
March 1, 2005
1.3189
51.68
39.18
% change over the
period
52.44
130.71
51.35
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Can the Government Influence the
Value of the Dollar?
 Monetary Policy
 Changes in Interest Rate and Investment
Flow
 Fiscal Policy
 Borrowing leading to changes in Interest
Rate
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Currency Trade and Exchange
Regime
Floating Exchange Rate Regime
 Currency Trade by Central Banks
Fixed Exchange Rate Regime
 Does Recent Dollar Depreciation Impact
the Trade Deficit with CHINA?
 Price Stabilization and Fixed Exchange
Rate Regime
 Risk to CB
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The BIG picture




Rise in Imports  Increase in Supply  Depreciation
Rise in Exports  Increase in Demand  Appreciation
Influx of Investment  Increase in Demand  Appreciation
Outflow of Investment  Increase in Supply  Depreciation
 BALANCE OF PAYMENTS – An Economy’s International
Balance Sheet (www.bea.gov)
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Balance of Payments
 Current Account
 Trade
 Income flow
 Financial Account
 Investment Flow
• Paying for Foreign Goods with Domestic Financial
Assets – the US Example
(US BoP)
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