The freely floating currency system may have its advantages and disadvantages. However, it has fundamentally changed the way we look at currencies. In doing so, it has created one major obstacle. We now compare currencies with one another to check if they have gained or lost value. This way of measurement is bizarre to say the least! Currencies are meant to be exchanged for goods. Hence, their value must be measured against the amount of goods that they can buy. Comparing them against one another will provide an extremely misleading image especially when all currencies are falling in value. That…
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What is a Currency War ? A currency war is a situation wherein devaluation of currency by one country is retaliated by a competitive devaluation from the other country. For instance if the United States were to devalue the dollar against the Pound Sterling and if the British retaliated with their own devaluation then the situation could be accurately described as a currency war. Devaluation is believed to cause growth in the short run. However, this growth comes at the expense of one�s trading partners. Hence currency wars are also known as “beggar thy neighbor” policy! What Happens When a Currency…
The Asian financial crisis was another major currency crisis that happened during the 1990’s. The crisis assumed epic proportions. This is because it started in only one country i.e. Thailand whose currency faced an attack from speculators. However, in a very short span of time the crisis had gripped the entire South East Asian region. Countries like Vietnam, Malaysia and Indonesia all got involved in this crisis which almost appeared without any prior warnings. This phenomenon of the crisis spreading quickly to multiple countries is called the “Asian contagion”. In this article, we will discuss these events in detail. Dollar…
During the period of 1998 to 2002, the Argentina economy underwent a massive financial crisis. This was nothing unheard of, if economic experts were to be believed. Argentina had suffered severe bouts of hyperinflation in the preceding years. However, the Argentinean politicians had somehow found a way to navigate through two major financial crises without any significant damage. This time, the issue became much more severe. The Argentinean crisis blew out of proportion. In fact many compare it with the Great Depression claiming that it has put Argentina behind by several decades and has ended up wiping out the existence…
The freely floating currency system is the predominant system of foreign exchange that is prevalent in the world today. As globalization has progressed, more countries have abandoned their currency pegs and have allowed their currencies to freely float. Some have been forced to do so by market participants whereas others have made their choice in the light of the advantages that this system has to offer. In this article, we will have a look at the advantages and disadvantages that are faced by any country when it adopts a floating exchange rate regime. Advantages Market Determined Rates: Freely floating exchange rate…
The financial community of the world is at a consensus that the current economic system provides the United States government with exorbitant privileges. This means that the system does not treat all countries equally. Rather it provides an unfair advantage to the United States because the dollar is the reserve currency of the world. The Infamous Comment In 1965, The French President General Charles De Gaulle referred to the dollar having “exorbitant privilege” while addressing a press conference. The view presented by Charles De Gaulle was that the United States government was receiving excessive privileges even though many economists think…
he exchange rate between two currencies is determined by the interaction of several variables. Some variables have more influence on the determination of currency rates than the others. One such variable is the interest rate. In general, changes in the interest rate create huge fluctuations in the value of all currencies. In fact all major currency crises have invariably been preceded by a major change in the interest rates. Also, there are some currencies like the Eurodollar pair that are always sensitive to interest rate changes. In this article, we will understand why interest rate changes influence the Forex market to such…
What Are Special Drawing Rights (SDRs)? Special Drawing Rights (SDRs) were a part of the monetary system that was created post World War-2 in the Bretton Woods arrangement. Since the United States had almost all of the gold reserves of the world at that time, the Special Drawing Rights (SDRs) were intended as a supra-national currency that could be used instead of gold, thereby reducing dependence on gold. However, the idea of an abstract currency replacing gold has not caught up with the world till date. The Special Drawing Rights (SDRs) were virtually unheard of till the year 1968 and…
Concept of Carry Trade Carry trade is a kind of trade that is peculiar to the Forex market. In other markets, traders trade with the intention of benefitting from capital appreciation. However, in case of carry trade, traders have two expectations. They want to earn cash from capital appreciation as well as from the interest rate differentials that arise from buying or selling currency. Since interest rate differentials are peculiar to the Forex market, so is the concept of carry trade. It must be understood that the concept of rollovers and carry trade is in stark contrast to that of…
Arbitrage was earlier restricted only to commodities that could be traded easily in the markets. It is a phenomenon born out of the financial markets. However, the recent developments in the world have created a situation wherein arbitrage has become possible even in the labor markets and this arbitrage is directly influenced by the Forex rate. In this article, we will provide more details about labor arbitrage and its effects. What is Labor Arbitrage ? The barriers to international trade have been removed. Nowadays, there are multinational corporations that have business interests all over the world. As a result, these…
