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Author Topic: Solution Foreign Exchange Rate analysis  (Read 14293 times)

JuliaKessler

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Solution Foreign Exchange Rate analysis
« on: May 10, 2009, 10:12:56 am »
Hello,
see solution attached
Have a nice weekend
Julia

Monetary policy decision ECB: the ECB cut down the interest rate to 1%. Thus, it tried to
reinforce the real economy, as a lower interest rate means that investment is cheaper and more
investment leads to a better economic performance. With a better economic performance the
currency becomes stronger as more people invest in the country in hopes of higher expected
future returns.
Empirical evidence: the euro won 2.39 cents against the dollar (1.3395$/€ to 1.3634$/€)
The same way of supporting the economy (and currency) was chosen by the Czech central
bank cutting its interest rate to 1.5%.
Empirical evidence: The korina went up to Kcs 19.788/dollar.
A report was published, that said that the US economy lost 539,000 jobs in April.
A higher unemployment rate means first, a worse economic performance and second, less
internal consumption (important in the US). As less people invest in the country and people in
US buy less goods and thus worsen the economic performance, the domestic currency gets
weaker.
Empirical evidence: the dollar lost against most currencies.
“A massive onslaught of US Treasury supply” (FT,2009) and the fact that equity markets are
recovering led to higher US yields. But this couldn’t reinforce the dollar. One might think of
two reasons for the weakness of the dollar: the US budget deficit going with a higher US
Treasury supply and the increasing risk appetite among investors:
Government deficit (Metzler’s analysis): an increasing budget deficit causes investors to lose
confidence in that country’s ability to serve its debt. They know that the government must
raise taxes later or risk inflation to serve its debt. Higher taxes and inflation causes the
currency to get weaker. Thus, investors disinvest in times of a high budget deficit. A counterargument
is Feldstein’s analysis, but it only happened once in history and cannot be seen at
the moment.
Empirical evidence: US Gross Debt rose to 11,208 (78,1% of GDP) in the 1st Quarter of 2009
(2008 10,699.8; 74.6% of GDP)
Risk appetite: “Emerging market currencies were also boosted by improving risk appetite,
which tends to drive investors from safe havens such as the dollar and yen and into riskier
assets” (FT, 2009).
Empirical evidence: South Korean Won, Hungarian Forint (both riskier assets) gained against
the dollar
Sources:
FT,2009: Kassel, Johanna. “Treasury supply weighs on dollar.”
Financial times (online): 2009 (May 8 11:18)
http://www.ft.com/cms/s/0/766d35ae-3bb8-11de-acbc-00144feabdc0.html
Wikipedia: 2009 (May 10 10:05)
http://en.wikipedia.org/wiki/United_States_public_debt
« Last Edit: August 10, 2009, 10:38:31 am by Ted Azarmi »

Offline HannahHerrmann

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Re: Solution Foreign Exchange Rate analysis
« Reply #1 on: May 10, 2009, 10:46:10 am »
My homework is attached.

Best regards
Hannah Herrmann

The unemployment as a factor that affects the value of currencies
The unemployment rate is an important indicator of an economy's strength. A lower
unemployment indicates a better economic performance. People expect to receive
higher future returns and that’s why they invest in a country. They buy the country’s
currency which therefore rises. However, a lower unemployment can also implicate a
higher expected inflation if the central bank of a country doesn’t increase the interest
rate. In this case, people don’t want to invest and the currency depreciates.
At the moment, a “positive” development of the unemployment rate leads to a
stronger currency.
Canada’s currency, for example, rose to a six-month high after the nation’s
employers unexpectedly created jobs in April. On 8 Mai, the Canadian dollar
appreciated 1.1% to 1.1576 C$ per US$ from 1.1699 C$ on the previous day. The
unemployment rate stayed at 8 % as employers added a net 35,900 workers in April
after a reduction of 61,300 in the previous month.
Due to the financial crisis, investors consider the development of the unemployment
rate already as positive, if there are less job cuts than expected.
The unemployment rate of New Zealand rose to a six-year high of 5% in the first
quarter, but it was a smaller rise than economists had forecast. Investors suggested
that the Reserve Bank may not cut interest rates further and that’s why the NZ dollar
rose from 0.583 US$ to 0.591US$.
Moreover, the unemployment rate of a country can have an effect on another
country’s currency; e.g. Mexico’s peso rose after a U.S. government report showed
that employers had cut fewer jobs in April than economists had expected. As the
United States buy 80% of Mexican exports, people implicate the U.S. development
when forecasting the Mexican development. Hence, the peso advanced 0.5% to
13.0979 per U.S.$ on 8 Mai from 13.1587 the previous day.
However, even though the U.S. government report showed good news for the United
States, the US$ became weaker. Although the U.S. companies eliminated only
539,000 of 600,000 expected jobs, the dollar lost 1.8 % to $1.3633 versus the euro,
the weakest level since 26 March. In spite of the financial crisis, the US$ seems to
be a relatively safe currency. The good news of the U.S. unemployment rate reduces
the investors’ demand for safety and makes them sell the U.S.$ in favour of more
volatile but higher-yielding currencies. This behaviour explains the dollar’s drop
against the euro and other major currencies on 8 Mai.
Hannah Herrmann
« Last Edit: August 10, 2009, 10:39:32 am by Ted Azarmi »

Offline leoniekrauss

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Re: Solution Foreign Exchange Rate analysis
« Reply #2 on: May 10, 2009, 03:30:53 pm »
Foreign Exchange Rate Analysis
,,New data about the business cycle make the Euro stronger“
The exchange rate rose to 1,3484 Dollar. Reasons for this are the new positive data
about the business cycle. Economic in the Euro-zone seems to stabilize: the
industrial output did not decline in march as well as a 3.3 % rise in orders could be
recorded. Besides the stock market performs well.
The economic growth is important for the investor’s decisions. When people expect
an increase in GNP they are more disposed to invest in that country as they hope to
generate a higher expected future return. Also the stock market is an significant
indicator of an economy’s strength. As it performs well, more international capital
flows to that country. Thus, that currency becomes stronger.
Another example for an important economic indicator which affects the value of a
currency is the employment rate. As it was announced that the US economy lost
539,000 jobs in April increasing the unemployment rate to 8.9% the dollar dipped. It
lost 1.8 % against the euro and 1.2 % against the pound to $ 1.5092.
Low unemployment characterises a good economic performance. The currency again
becomes stronger as more Investors invest in that country because they are
expecting high future returns. Unemployment probably leads to lower consumer
demand finally leading to less future production and recession. As the US announced
their high unemployment rate, less people are willing to invest in dollar which makes
that currency weaker.
« Last Edit: August 10, 2009, 10:40:12 am by Ted Azarmi »

Offline Michal Wilczek

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Re: Solution Foreign Exchange Rate analysis
« Reply #3 on: May 11, 2009, 11:40:44 am »
Homework is attached.

Best regards,

Michal Wilczek

Offline carolin.schmidt

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Re: Solution Foreign Exchange Rate analysis
« Reply #4 on: May 11, 2009, 10:59:03 pm »
Attached please find my solution.

Regards,
Carolin Schmidt

Offline danielfroeschle

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Re: Solution Foreign Exchange Rate analysis
« Reply #5 on: May 12, 2009, 09:33:08 am »
My homework is attached

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Daniel Froeschle

Offline Benjamin Guin

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Re: Solution Foreign Exchange Rate analysis
« Reply #6 on: May 12, 2009, 06:51:41 pm »
Here is my solution. See you all on Thursday!

With best regards,
Benjamin

Offline Jochen Schäfer

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Re: Solution Foreign Exchange Rate analysis
« Reply #7 on: May 12, 2009, 09:57:27 pm »
Please find my homework attached.

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Jochen Schäfer

Offline Hülle

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Re: Solution Foreign Exchange Rate analysis
« Reply #8 on: May 12, 2009, 10:45:04 pm »
Please find my solution attached.

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Offline paula.schliessler

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Re: Solution Foreign Exchange Rate analysis
« Reply #9 on: May 13, 2009, 01:17:12 pm »
Please find my solution attached

Paula Schliessler

Offline bbruggem

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Re: Solution Foreign Exchange Rate analysis
« Reply #10 on: May 13, 2009, 01:18:55 pm »
The solution is attached.

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Bettina Brüggemann

Offline M.Hareng

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Re: Solution Foreign Exchange Rate analysis
« Reply #11 on: May 13, 2009, 02:59:57 pm »
Hey,

my homework is Attached!

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Michael Hareng

Offline RoyaS.

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Re: Solution Foreign Exchange Rate analysis
« Reply #12 on: May 13, 2009, 06:36:44 pm »
Attached please find my solution.

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Roya Shabankarian

Offline annika.kasparek

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Re: Solution Foreign Exchange Rate analysis
« Reply #13 on: May 14, 2009, 07:44:57 am »
Please find solution attached.

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Annika Kasparek

Offline Winge

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Re: Solution Foreign Exchange Rate analysis
« Reply #14 on: May 14, 2009, 10:34:32 am »
Homework is attached.

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Winfried Gernert