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Essays on International Financial Markets - Institutions and Money, Exchange Rate as an Instrument of Monetary Policy, Exchange Rate Dependencies Assignment

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The paper “ International Financial Markets - Institutions and Money, Exchange Rate as an Instrument of Monetary Policy, Exchange Rate Dependencies”   is an informative example of an assignment on the finance & accounting. There are many factors that can lead to appreciation or depreciation of a country’ s currency against the USD. Exchange rates are often unpredictable in the world of business as found out by Moschella, M. (2015). There are major indicators that lead to a change in these exchange rates. Appreciation or depreciation of the currency of any country against the USD can be used as an indicator for the determination of the economic health of the country.

For instance, due to the economic instability in Argentina within the last period of three years, the Argentine Peso has depreciated against the USD by 32.1654%. The following factors affect the currency of any state against the USD. First are the Gross Domestic Product (GDP) and the Economic Growth of a country. According to Habib, M. M., & Stracca, L. (2012) The GDP gives the total market value of any goods and services offered by any nation.

Due to this fact, the GDP is widely used to measure the economic health and growth of any country (Levy-Yeyati, E et al. 2013). A good example is in the year 2011 whereby the real GDP of United States appreciated from a value of 15,052 to 15,679 billion dollars promoting the USD to appreciate almost all the currencies during that fiscal period. The second factor is the interest rates of a given country. Interest rates are very essential since they affect the fluctuation of the exchange rates of any given country.

Central banks or respective countries are obliged with the responsibility of controlling the interest rates of the country to secure the economic health of the country as posited by Levy-Yeyati, E et al. (2013). When the interest rates are considerably high, then potential investors are likely to receive high returns thus attracting many investors. This, in turn, attracts foreign capital thus leading to the appreciation of the currency of the country. Considering the other hand, when interest rates are considerably low, the currency of a given country depreciates.

This implies that the currency becomes less favorable to save money for investors. This scares away investors as claimed by Bé reau, S. et al. (2013). The demand for currency declines and spending, on the other hand, increases sharply. The other implication of low-interest rates is borrowing which leads to inflation. Thirdly, public debt also affects the appreciation or depreciation of a given currency against the USD (Doluca, H., 2014). Governments usually do large-scale borrowing to facilitate in funding projects for their countries. This facilitates economic growth since it creates more employment opportunities.

However, if the debt is large with a large deficit, there can be undesirable consequences. This may, in turn, push away potential investors. A good example is the debt crisis in Greece. This has led to undesirable consequences on the economy of Greece. The debt crisis has been estimated to be above 15.6% of the GDP, which is leading in the European Union nations (Richards, P. D. et al. 2015). Finally, political and economic stability also affect appreciation or depreciation. This affects the currency value for any given country.

Political activities such as political turmoil lead to political instability that lowers investors’ confidence. Consider an example of South Africa. Since the start of the Xenophobic fights in the country around 67% of the private businesses in the country has withholder decisions as a result of political instability created by the fights in the country. This has, in turn, led to the depreciation of approximately -30%.

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