Currency Value Determination: Fair or Unfair?

What is Currency Value?

The currency value affects you consistently at the petrol station and the supermarket. Interest in fuel and food is inelastic. Producers realize you need to purchase gas and food consistently. It’s not generally conceivable to defer buys when the value rises. You will get it at the more exorbitant cost for some time until the price goes back to normal. Have you ever wondered what and who determines the currency value?

Every nation has its strategies for deciding the currency value, and there are plenty of elements that go into that choice. The value of currency mainly depends on three factors:

Exchange Rates 

Exchange rates are determined by Forex traders on the foreign exchange market. They consider supply and demand, and afterward factor in their assumptions for the future. 

Consequently, the currency value fluctuates all through the day. Exchange rates are driven by financial backers attempting to sort out where a higher rate of return will be accessible later on, while simultaneously attempting to reduce and expand the dangers they face if trade rates shift in a manner they didn’t anticipate. On account of these elements, exchange rate markets become unpredictable. For instance, they frequently respond rapidly and pointedly when new data emerges about the conceivable outcomes of changes in growth rates, inflation rates, etc. 

The principal issue is that an exchange rate is a value, the value of one currency compared to some other currency. A weaker currency will in general support exporters because their production costs in the domestic currency are lower contrasted with the income they acquire when selling in a foreign currency.

A stronger currency will in general support imports since they can bear to purchase more merchandise in the world economy.

Treasury Notes

The subsequent technique is the worth of Treasury notes. They can be changed over effectively into dollars through the secondary market for Treasuries. 

The currency value of the U.S. dollar rises when the demand for treasuries is high.

Foreign Exchange Reserves

The third way is by foreign exchange reserves. Foreign Exchange reserves are the number of dollars held by foreign governments. The more these governments hold, the lower the supply. That makes the U.S. currency more important. If these governments sell all their dollar and Treasury possessions, the dollar would fall. And it would be worth a lot less.

Geopolitics, Inflation and Spending Power

The currency value also majorly depends on other factors that affect the economy such as inflation, interest rates, trade deficit, employment, macroeconomic policies, commodity prices, geopolitical conditions imports and exports, inflation, employment, growth rate, equity markets, etc.

Income levels and employment impact currency’s worth through shopper spending. When salaries rise, individuals spend more. More popularity for imported products increases the interest for foreign currencies and, accordingly, debilitates the local currency. 

Any country that sells a larger number of goods and services in overseas markets than it purchases from them has a trade surplus. This implies more foreign currency comes into the country than what is paid for imports. This reinforces the local currency.

The geopolitical conditions of a country affect its currency value. If a country lacks a stable ruling government, the currency of such a country is likely to fall in value relative to more developed, stable nations. 

A few countries use a pegged exchange rate that is set and is controlled by the government. This rate will not fluctuate intraday. The rate is set against another major currency (like the euro, the U.S. dollar, or the yen). The government buys its currency against the one it is pegged to maintain its exchange rate. Countries that chose to peg their currency against the US $ include China, Hong Kong, and some GCC nations, etc.

Pegged trade rates can decrease relative price volatility and exchange rate speculation, bringing about higher investment and trade leading to faster development. Stable local currency and a pegged exchange rate suggest that traders don’t need to confront risks, and subsequently will be more able to facilitate trade.

Since oil is the main commodity in the GCC, and the oil price is fixed in dollars, any exchange rate variance could radically decrease income if the currencies were unpegged. Most GCC nations are fixed to the US dollar to stay away from currency fluctuation and dispose of vulnerabilities in foreign transactions.

Some countries also artificially tweak the exchange rate to gain an unfair advantage in international trade. China has its currency pegged to the US $ keeps the worth of the yuan low contrasted with different nations. The impact on exchange is that Chinese fares are less expensive and more appealing contrasted with those of different countries. 

Up till the value of yuan is low compared to other major world currencies, customers utilizing foreign exchanges can purchase a greater number of China’s products than they would if the yuan were more costly. In particular, if the People’s Bank of China keeps the yuan powerless contrasted with the U.S. dollar, buyers utilizing the greenback can purchase more Chinese fares. By keeping the prices low, China motivates the world to buy its products, which ensures its economic prosperity.

About the Author – Ishita Jha is a second-year media and communication student at Manipal Institute of Communication.