How Foreign Exchange Rates Underpin the Dynamics of the Global Economy

16 Pages Posted: 13 Feb 2015

See all articles by William J. Dodwell

William J. Dodwell

Consultant to Financial Institutions

Date Written: February 8, 2015

Abstract

The currencies of nations, in their utility as a medium of exchange and store of value, behave variously according to the integrated dynamics of free enterprise, the central bank and government policy. As such, foreign exchange rates fluctuate constantly with consequences for the growth of individual countries and the global economy. This paper examines the influences of monetary policy, fiscal policy, international trade and investment, and currency trading on exchange rates. Focus centers on the optimal factors that establish a sound currency essential for a successful economy. In evidence is the primacy of the U.S. dollar as an international reserve currency and a safe haven asset indicative of America’s economic and political hegemony, despite occasional faltering.

The study illustrates the nature of the myriad variables affecting currency values and how they impinge on economic performance, presenting several currency profiles as examples. It covers the dynamics of money creation and interest rate policy, trade and capital flows, central bank intervention, currency controls, and black markets. In addition, the paper shows how currencies react to current world events and developments, including deflation, European Central Bank quantitative easing, competitive devaluations, the floating Swiss franc, plummeting oil prices, and the tensions in Greece. Also discussed are the contemporary anomalies of foreign exchange manipulation and the bitcoin virtual currency.

Keywords: exchange rates, economic growth, monetary policy, money creation, interest rates, reserve currency, safe haven, quantitative easing, deflation, currency risk, currency trading

JEL Classification: F31, G15, F00, E50, A10, E00, E20, E40, M21

Suggested Citation

Dodwell, William J., How Foreign Exchange Rates Underpin the Dynamics of the Global Economy (February 8, 2015). Available at SSRN: https://ssrn.com/abstract=2563796 or http://dx.doi.org/10.2139/ssrn.2563796

William J. Dodwell (Contact Author)

Consultant to Financial Institutions ( email )

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