How Foreign Exchange Rates Underpin the Dynamics of the Global Economy
16 Pages Posted: 13 Feb 2015
Date Written: February 8, 2015
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: Suggested Citation