Transcript EXCHANGE RATES

EXCHANGE RATES
The exchange rate
 A rate ......... which one .......... can
be exchanged for another.
 The value of another country’s
currency
 the price .......... which one currency
can be bought.
Currencies:
the
the
the
the
the
US dollar (US$)
euro (€)
yen(¥)
British pound (£)
kuna (HRK)
the dollar vs. 20,000 US dollars
The dollar has slipped by around 3% against
the yen and the euro since November
Economist, March 06
Which of the three rates are described below?
FIXED, MANAGED FLOATING or FLOATING E.R.?
1.
2.
3.
4.
5.
6.
7.
8.
9.
a rate which is set by the government (central bank)
only........
a rate which is determined by the private market
through supply and demand ............
its value will decrease only if demand is low (and viceversa) .................
it does not change before it is centrally decided ...........
if the rate changes more than the central bank allows,
the bank intervenes (buys or sells the currency) ......
based on the free market only........
its value will rise only if demand is high .................
a combination of the other two types ............
example of intervention in the economy ............
Which of the three rates are described below?
FIXED, MANAGED FLOATING or FLOATING E.R.?
1.
2.
3.
4.
5.
6.
7.
8.
9.
a rate which is set by the government (central bank) only
FIXED (PEGGED) EXCHANGE RATE
a rate which is determined by the private market through
supply and demand FLOATING E.R.
its value will decrease only if demand is low (and vice-versa)
FLOATING E.R.
it does not change before it is centrally decided FIXED
if the rate changes more than the central bank allows, the
bank intervenes (buys or sells the currency) MANAGED
FLOATING EXCHANGE RATE
based on the free maket only FLOATING EXCHANGE RATE
its value will rise only if demand is high FLOATING E.R.
a combination of the other two types MANAGED FLOATING
example of intervention in the economy FIXED E.R., MANAGED
FLOAT.
http://www.investopedia.com/articles/03/020603.asp
What types of exchange rates are the
following sentences likely to belong to?
 If a currency is overvalued, it needs
to be devalued.
 If a currency is undervalued, it needs
to be revalued.
 A currency appreciates/depreciates
against another currency.
Types of exchange rates
FIXED
EXCHANGE
RATE
FLOATING
EXCHANGE
RATE
MANAGED
FLOATING
RATE
Types of exchange rates
to be pegged against...
speculation
central
parity
floor and ceiling
gold
supply & demand
EMS
Bretton-Woods
freely
determined
divergence
ERM
intervene
US dollar
reflecting purchasing
power parity
Types of exchange rates
FIXED
EXCHANGE
RATE
FLOATING
EXCHANGE
RATE
MANAGED
FLOATING
RATE
-Bretton-Woods
-gold
-to be pegged
against
- US dollar
-supply &
demand
-reflecting
purchasing
power parity
-speculation
-central parity
-EMS
-floor and
ceiling
-divergence
- Intervene
The period of gold convertibility
 The Bretton-Woods Agreement of 1944 established 1
2 rates, defined in terms of gold and the US dollar.
Between 1944 and 1971 many currencies were 3 4
the US dollar, i.e. their 5 with the US dolar were fixed.
One US dollar was a promissory note issued by the US
6 and could be exchanged for 1/35th of an 7 of gold.
Under this system, overvalued currencies could only
be adjusted with the agreement of the 8 9 10. Such
adjustments were called 11 or 12. The BrettonWoods system of gold 13 and 14 against the dollar
was abandoned in 1971, because following inflation,
the Federal Reserve did not have enough gold to
guarantee the American 15.
Match the words below (1):
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
pound
market
The United States
The Bretton-Woods
Fixed
Promissory
An ounce of
Overvalued
Gold
depreciating
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exchange rate
currency
gold
currency
sterling
Agreement
note
forces
Treasury
convertibility
Match the words below (2):
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

purchasing power
peg one currency
the European
undervalued
the International
capital
currency
single
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

fluctuations
currency
currency
Monetary Fund
parity
gain
Monetary System
against another
Match the words below (3):
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


Exchange Rate
Floating
Selling
Hedge against
Appreciating
Financial
Buying
Stable
Convertible
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Currency
currency
price
Currency
Mechanism
Price
exchange rate
currency fluctuations
deregulation
The abolition of exchange controls (C)
Figures?
 1970s, 1980s
 95%
 1990s, $300bn
 30%
MacKenzie
 The period of gold convertibility
 Floating exchange rates
 The abolition of exchange controls
 Intervention and managed floating exchange rates
 The power of speculators and the collapse of the EMS
 Why many business people would prefer a single
currency
 The introduction of the single European currency