22241528 the Foreign Exchange Market

8/12/2019 22241528 the Foreign Exchange Market

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Economic Analysis assignment

oreign exchange marketSubmitted to : Mrs. Gargi Bandhopadhyay

Submitted by:Students name Roll no.

Garima Sharma 108H21Nidhi Upadhyay 108H25Kanika Bhatia 108H26

aras Suri 108H39!shaan Sa"ena 108H43Gurneet Singh 108H55Shi#angi $oshi 108H58

%MBA class o& '()(*

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+eclaration

We hereby declare that ths ass!nment enttled "#ore!n $%chan!e &ar'et( s )rtten andsubmtted by us under the 'nd !udance o* &rs. +ar! ,andho-adhyay.

he content o* the -ro/ect s based on secondary data collecton. hs ass!nment s not co-ed

*rom any source or other -ro/ect submtted *or the smlar -ur-ose.

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A,KN-/E+GEMEN0

hs ass!nment )ould hae been m-ossble )thout a host o* hel-n! hands /onn! to ma'e

the load l!hter. he )or' no) com-leted bears testmony to ther 'nd su--ort )e aaled

durn! ts *ormaton.

We )ould l'e to be !rate*ul to our *aculty &rs +ar! ,andho-adhyay *or her !udance and

encoura!n! su--ort. lso to the lbrary at mty ,usness school *or -rodn! us )th the

boo's )hch )ere the source o* n*ormaton o* our -ro/ect.

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,ontents

0opic age no.1. #ore!n e%chan!e mar'et n ntroducton 1

2. #ore!n e%chan!e nstruments. 4 3. #actors n*luencn! $%chan!e rates 5 4. etermnaton o* $%chan!e Rates 10

5. #ore!n $%chan!e #orecastn! n -ractce 19 6. **cal ctons to n*luence $%chan!e Rates 23

. #le%ble 7s #%ed $%chan!e rates 26 8.,blo!ra-hy 29

0he 1oreign E"change Market: An introduction

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hat is &oreign e"change rate or e"change rate2

n e%chan!e rate s sm-ly the -rce o* one currency n terms o* another. he -rocess by )hch

that -rce s determned de-ends on the -artcular e%chan!e rate mechansm ado-ted. n a

*loatn! rate system the e%chan!e rate s determned drectly by mar'et *orces and s lable to

*luctuate contnually as dctated by chan!n! mar'et condtons. n a *%ed or mana!ed rate

system the authortes attem-t to re!ulate the e%chan!e rate at some leel that they consder

a--ro-rate. Such a system o*ten seems a--ealn! to those )ho are troubled by the uncertantes

o* the -resent h!hly olatle *loatn! rate enronment.

,ut the choce o* e%chan!e rate re!me noles consderatons that e%tend beyond the stablty

or other)se o* currency -rces. hs )ll become clearer a*ter an e%amnaton o* some

*undamentals o* the *ore!n e%chan!e mar'et.

Economics o& the 1oreign E"change Market

n a *loatn! e%chan!e rate re!me the -rce o* the dollar l'e any other mar'et:determned -rce

de-ends on the releant *orces o* su--ly and demand. ,ut )hat are the releant *orces o* su--ly

and demand n the *ore!n e%chan!e mar'et;

o try to ans)er ths selln!? yen n return. So the =a-anese demand *or dollars >mrrored by the

su--ly o* yen? s determned by the e%-orts to =a-an and our ca-tal n*lo) *rom that country.

n the other sde o* the mar'et the ustralan demand *or yen s determned by our need to -ay

*or m-orts *rom =a-an and *or any ca-tal nestment that )e underta'e there. We buy those

yen by su--lyn! ustralan dollars n return. hus the su--ly o* dollars >mrrored by the

demand *or yen? s determned by our m-orts *rom =a-an and our ca-tal out*lo) to that

country.

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n summary then the demand *or ustralan dollars re*lects the behaor o* our e%-orts and

ca-tal n*lo) )hle the su--ly o* dollars re*lects the behaor o* our m-orts and ca-tal

out*lo). n other )ords transactons on the *ore!n e%chan!e mar'et echo the nternatonal trade

and *nancal transactons that are summar@ed n the balance o* -ayments. Wthn the balance o*

-ayments the relatonsh- bet)een our e%-orts and m-orts o* !oods and serces s ca-tured by

the balance o* current account )hle the relatonsh- bet)een ca-tal n*lo) and ca-tal out*lo)

s ca-tured by the balance o* ca-tal account. he acttes o* nternatonal currency s-eculators

a**ect the e%chan!e rate drectly throu!h ther m-act on ca-tal *lo)s.

he dstn!ushn! characterstc o* a *loatn! e%chan!e rate system s that the -rce o* a currency

ad/usts automatcally to )hateer leel s re


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the *ore!n e%chan!e mar'et runs n both drectons. Bet us su--ose *or e%am-le that recesson

n the =a-anese economy leads to a declne n the demand *or ustralan e%-orts. n tsel* ths

)ll tend to reduce economc actty n ustrala. ,ut ths tendency )ll be o**set by an

assocated de-recaton o* the dollar )hch )ll nduce an e%-anson o* e%-orts a contracton o*

m-orts and -erha-s an ncrease n net ca-tal n*lo) all o* )hch )ll hel- to cushon the

ustralan economy a!anst recesson. n analo!ous mechansm )ould o-erate to reduce the

m-act o* an ntal declne n =a-anese nestment n ustrala. ,oth cases llustrate the role o*

e%chan!e rate *le%blty n nsulatn! our economy to some de!ree a!anst nternatonal

economc nstablty. ,y the same reasonn! *loatn! e%chan!e rates also hel- to dmnsh the

nternatonal transmsson o* our o)n domestc economc nstablty.

,haracteristics o& the 1oreign E"change Market

he #ore% mar'et does not e%st -hyscally t s a *rame)or' )here -artc-ants are connected

by com-uters tele-hones and tele% >SW#? and o-erates n most *nancal centres !lobally.

,ecause the #ore% mar'et s so h!hly nte!rated !lobally t can o-erate 24 hours a day C )hen

one ma/or mar'et s closed another ma/or mar'et s o-en to *acltate trade occurrn! 24 hours a

day mon! *rom one ma/or mar'et to another. &ost e%chan!es o* currency are made throu!h

ban' de-osts .e. trans*erred electroncally *rom one account to another.

he olume o* *ore!n e%chan!e transactons )orld)de s assumed to be a--ro%mately AS 2

trllon -er day. he aera!e daly turnoer n the South *rcan mar'et s R11 bllon -er day

and Standard ,an' s the reco!nsed leader n the domestc *ore!n e%chan!e mar'et handln!

more than 30D o* South *rcas *ore!n e%chan!e olume. he #ore% mar'et s an oer:the:

counter mar'et .e. tradn! n *nancal nstruments that are not lsted or aalable on an o**cally

reco!nsed e%chan!e >such as the =S$ C =ohannesbur! Stoc' $%chan!e? but traded n drect

ne!otaton bet)een buyers and sellers. radn! ta'es -lace tele-honcally or electroncally.

hy do 3e make use o& the 1oreign E"change Market2


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radn! n a domestc mar'et s substantally d**erent *rom don! busness n an o**shore

mar'et. n the com-le% )orld o* nternatonal trade merchants *ace a number o* rs's that need

to be mana!ed n order to ensure the success o* ther cross C border transactons. n order to

-rotect themseles these cor-oratons a--ly hed!n! techn


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number o* *ore!n e%chan!e nstruments hae been des!ned *or e**ecte hed!n! as )ell as

enhancement o* returns. he *ollo)n! nstruments and -roducts are most common to the

#ore!n $%chan!e &ar'et to *acltate nternatonal trade and )ll be coered n *uture #ore%

,ulletns S-ot transactons #or)ard ransactons >#$Es? -tons >erates o* e%chan!e

rates? nternatonal money trans*ers +uarantees Eommercal Eustomer #ore!n Eurrency

accounts ocumentary Eredt and Eollectons

1actors in&luencing e"change rates

#ore!n e%chan!e rates are e%tremely olatle and t s ncumbent on those noled )th *ore!n

e%chan!e : ether as a -urchaser seller s-eculator or nsttuton : to 'no) )hat causes rates to

moe.

ctually there are a arety o* *actors : mar'et sentment the state o* the economy !oernment

-olcy demand and su--ly and a host o* others.

he more m-ortant *actors that n*luence e%chan!e rates are dscussed belo)

Strength of the Economy :he stren!th o* the economy a**ects the demand and su--ly o*

*ore!n currency. * an economy s !ro)n! *ast and s stron! t )ll attract *ore!n currency

thereby stren!thenn! ts o)n. n the other hand )ea'nesses result n an out*lo) o* *ore!n

e%chan!e. * a country s a net e%-orter >as )ere =a-an and +ermany? the n*lo) o* *ore!n

currency *ar outstr-s the out*lo) o* ther o)n currency. he result s usually a stren!thenn! n

ts alue.

Political and Psychological Factors: Foltcal or -sycholo!cal *actors are beleed to hae an

n*luence on e%chan!e rates. &any currences hae a tradton o* behan! n a -artcular )ay

such as S)ss *rancs )hch are 'no)n as a re*u!e or sa*e haen currency )hle the dollar moes

>ether u- or do)n? )heneer there s a -oltcal crss any)here n the )orld. $%chan!e rates

can also *luctuate * there s a chan!e n !oernment. Some tme bac' ndas *ore!n e%chan!e

ratn! )as do)n!raded because o* -oltcal nstablty and conse


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Elnton )as m-eached the AS dollar )ea'ened. urn! the ndo:Fa' )ar the ru-ee )ea'ened.

*ter the 1999 cou- n Fa'stan >ctober7Goember 1999? the Fa'stan ru-ee )ea'ened.

Economic Expectations$%chan!e rates moe on economc e%-ectatons. *ter the 1999 bud!et

n nda there )as an e%-ectaton that the ru-ee )ould *all by D to 9D. Snce such e%-ectatons

a**ect the e%ternal alue o* the ru-ee all economc data : the balance o* -ayments e%-ort

!ro)th n*laton rates and the l'es : are analysed and ts l'ely e**ect on e%chan!e rates s

e%amned. * the economc do)nturn s not as bad as antc-ated the rate can een a--recate.

he moement really de-ends on the "mar'et sentment( : the mood o* the mar'et : and ho)

much the mar'et has reacted or dscounted the antc-ated7e%-ected n*ormaton.

Inflation Rates : t s )dely held that e%chan!e rates moe n the drecton rencrease n the su--ly o* domestc currency and decrease n the su--ly

o* *ore!n currency?.

Capital Movements: Ea-tal moements are one o* the most m-ortant reasons *or chan!es n

e%chan!e rates. Ea-tal moements o* *ore!n currency are usually more than connected )th

nternatonal trade. hs occurs due to a arety o* reasons : both -oste and ne!ate. When

nda be!an ts economc lberalsaton and nted #ore!n nsttutonal nestors >#s? to

-urchase e


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Speculation S-eculaton n a currency rases or lo)ers the e%chan!e rate. #or nstance the

*ore!n e%chan!e mar'et n enya s ery shallo). * a s-eculator enters and buys AS I1 mllon

t )ll rase the alue o* the AS dollar s!n*cantly. * a *e) others do so too the -rce o* the AS

dollar )ll rse een *urther a!anst the enya shlln!. he most *amous s-eculator n *ore!n

currency s &r +eor!e Soros )ho made oer a bllon -ounds sterln! n $uro-e >by correctly

-redctn! the dealuaton o* the -ound? and then s beleed to hae tr!!ered the *ree *all o* the

currences o* South:east sa.

. Balance of Payments s mentoned earler a net n*lo) o* *ore!n currency tends to

stren!then the home currency s:J:s other currences. hs s because the su--ly o* the *ore!n

currency )ll be n e%cess o* demand. !ood )ay o* ascertann! ths )ould be to chec' the

balance o* -ayments. * the balance o* -ayments s -oste and *ore!n e%chan!e reseres arencreasn! the home currency )ll become stron!er.

overnment!s Monetary and Fiscal Policies : +oernments throu!h ther monetary and *scal

-olces a**ect nternatonal trade the trade balance and the su--ly and demand *or a currency.

ncreasn! the su--ly o* money rases -rces and ma'es m-orts attracte. #scal sur-luses )ll

slo) economc !ro)th and ths )ll reduce demand *or m-orts and encoura!e e%-orts. he

e**ecteness o* the -olcy de-ends on the -rce and ncome elastctes o* demand *or the

-artcular !oods. H!h -rce elastcty o* demand means the olume o* a !ood s senste to a

chan!e n -rce. &onetary and *scal -olcy su--ort the currency throu!h a reducton n n*laton.

hese also a**ect e%chan!e rate throu!h the ca-tal account. Get ca-tal n*lo)s su--ly drect

su--ort *or the e%chan!e rate. Eentral !oernments control monetary su--ly and they are

e%-ected to ensure that the !oernments monetary -olcy s *ollo)ed. o ths e%tent they could

ncrease or decrease money su--ly. #or e%am-le the Resere ,an' o* nda to curb n*laton

restrcted and cut money su--ly. n enya the central ban' n order to attract *ore!n money nto

the country s o**ern! ery h!h rates on ts treasury blls. n order to mantan e%chan!e rates ata certan -rce the central ban' )ll also nterene ether by buyn! *ore!n currency >)hen there

s an e%cess n the su--ly o* *ore!n e%chan!e? and selln! *ore!n currency >)hen demand *or

*ore!n e%chan!e e%ceeds su--ly?. hs s 'no)n as Kcentral ban' nterenton. t must be noted

that the ob/ecte o* monetary -olcy s to mantan stablty and economc !ro)th and central

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ban's are e%-ected to : by ncreasn!7decreasn! money su--ly rasn!7lo)ern! nterest rates or

by o-en mar'et o-eratons : mantan stablty.

Exchange Rate Policy and Intervention $%chan!e rates are also n*luenced n no small

measure by e%-ectaton o* chan!e n re!ulatons relatn! to e%chan!e mar'ets and o**cal

nterenton. **cal nterenton can smoothen an other)se dsorderly mar'et. s e%-laned

be*ore nterenton s the buyn! or selln! o* *ore!n currency to ncrease or decrease ts su--ly.

Eentral ban's o*ten nterene to mantan stablty. t has also been e%-erenced that * the

authortes attem-t to hal*:heartedly counter the mar'et sentments throu!h nterenton n the

mar'et ultmately more stee- and sudden e%chan!e rate s)n!s can occur.

Interest Rates : n m-ortant *actor *or moement n e%chan!e rates n recent years s nterest

rates .e. nterest d**erental bet)een ma/or currences. n ths res-ect the !ro)n! nte!raton o*

*nancal mar'ets o* ma/or countres the reoluton n telecommuncaton *acltes the !ro)th

o* s-ecalsed asset mana!n! a!ences the dere!ulaton o* *nancal mar'ets by ma/or countres

the emer!ence o* *ore!n tradn! as -ro*t centres -er se and the tremendous sco-e *or

band)a!on and sm-orted scra- became

chea-er than the domestc one?. Muotas are not restrcted to deelo-n! countres. he Anted

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States m-oses


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+etermination o& E"change 4ates

n sm-le terms t s the nteracton o* su--ly and demand *actors *or t)o currences n the

mar'et that determnes the rate at )hch they trade. ,ut )hat *actors n*luence the many

thousands o* decsons made each day to buy or sell a currency; Ho) do chan!es n su--ly and

demand condtons e%-lan the -ath o* an e%chan!e rate oer the course o* a day a month or a

year;

hs com-le% ssue has been e%tensely studed n economc lterature and )dely dscussed

amon! nestors o**cals academcans traders and others. Stll there are no de*nte

ans)ers. Le)s on e%chan!e rate determnaton d**er and hae chan!ed oer tme. Go sn!le

a--roach -rodes a sats*actory e%-lanaton o* e%chan!e rate moements -artcularly short: and

medum:term moements snce the adent o* )des-read *loatn! n the early 190s.

hree as-ects o* e%chan!e rate determnaton are dscussed belo). #rst there s a bre*

descr-ton o* some o* the broad a--roaches to e%chan!e rate determnaton. Second there are

some comments on the -roblems o* e%chan!e rate *orecastn! n -ractce. hrd central ban'

nterenton and ts e**ects on e%chan!e rates are dscussed.

Some a--roaches to e%chan!e rate determnaton

"he Purchasing Po$er Parity %pproach

Furchasn! Fo)er Farty >FFF? theory holds that n the lon! run e%chan!e rates )ll ad/ust to

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chan!es n -rces and e%chan!e rates rather than on absolute -rce leels. Relate FFF holds

that there )ll be a chan!e n e%chan!e rates -ro-ortonal to the chan!e n the rato o* the t)o

natons -rce leels assumn! no chan!es n structural relatonsh-s. hus * the A.S. -rce

leel rose 10 -ercent and the =a-anese -rce leel rose 5 -ercent the A.S. dollar )ould

de-recate 5 -ercent o**settn! the h!her A.S. n*laton and lean! the relate -urchasn!

-o)er o* the t)o currences unchan!ed.

FFF s based n -art on some unrealstc assum-tons that !oods are dentcalN that all !oods are

tradableN that there are no trans-ortaton costs n*ormaton !a-s ta%es tar**s or restrctons o*

tradeN and Om-lctly and m-ortantlyOthat e%chan!e rates are n*luenced only by relate

n*laton rates.

,ut contrary to the m-lct FFF assum-ton e%chan!e rates also can chan!e *or reasons other

than d**erences n n*laton rates. Real e%chan!e rates can and do chan!e s!n*cantly oer tme

because o* such thn!s as ma/or sh*ts n -roductty !ro)th adances n technolo!y sh*ts n

*actor su--les chan!es n mar'et structure commodty shoc's shorta!es and booms.

n addton the relate erson o* FFF su**ers *rom measurement -roblemsWhat s a !ood

startn! -ont or base -erod; Whch s the a--ro-rate -rce nde%; Ho) should )e account *or

ne) -roducts or chan!es n tastes and technolo!y;

FFF s ntutely -lausble and a matter o* common sense and t undoubtedly has some aldty

Os!n*cantly d**erent rates o* n*laton should certanly a**ect e%chan!e rates. FFF s use*ul n

assessn! lon!:term e%chan!e rate trends and can -rode aluable n*ormaton about lon!:run

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FFF concentrates on one -art o* the balance o* -aymentsOtradable !oods and sercesO and

-ostulates that e%chan!e rate chan!es are determned by nternatonal d**erences n -rces or

chan!es n -rces o* tradable tems.

ther a--roaches hae *ocused on the balance o* -ayments on current account or on the balance

o* -ayments on current account -lus lon!:term ca-tal as a !ude n the determnaton o* the

a--ro-rate e%chan!e rate.

,ut n todays )orld t s !enerally a!reed that t s essental to loo' at the entre balance o*

-aymentsOboth current and ca-tal account transactonsOn assessn! *ore!n e%chan!e *lo)s

and ther role n the determnaton o* e%chan!e rates.

=ohn Wllamson and others hae deelo-ed the conce-t o* the "*undamental e


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he )hle !enerally a!reen! that t s not -ossble to dent*y -recse "e


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com-oston o* -rate sector -ort*olos.

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Geertheless the -ort*olo balance a--roach o**ers a use*ul *rame)or' *or studyn! e%chan!e

rate determnaton. Wth ts *ocus on a broad menu o* assets ths a--roach -rodes rcher

ns!hts than the monetary a--roach nto the *orces n*luencn! e%chan!e rates. t also enables

*ore!n e%chan!e rates to be seen l'e asset -rces n other mar'ets such as the stoc' mar'et or

bond mar'et )here rates are n*luenced not only by current condtons but to a !reat e%tent by

mar'et e%-ectatons o* *uture eents. s )th other *nancal assets e%chan!e rates chan!e

contnuously as the mar'et recees ne) n*ormaton about current condtons and n*ormaton

that a**ects e%-ectatons o* the *uture. he random character o* these asset -rce moements

does not rule out ratonal -rcn!. ndeed t s -ersuasely ar!ued that ths s the result to be

e%-ected n a )ell *unctonn! *nancal mar'et. ,ut n such an enronment e%chan!e rate

chan!es can be lar!e and ery d**cult to -redct as mar'et -artc-ants try to /ud!e the e%-ected

real rates o* return on ther domestc assets n com-arson )th alternates n other currences.

5o3 Good Are the 6arious Approaches2

he a--roaches noted aboe are some o* the most !eneral and most *amlar ones but there are

many others *ocusn! on d**erentals n real nterest rates on *scal -olces and on other

elements.

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he research on ths to-c has been o* !reat alue n enhancn! our understandn! o* lon!:run

e%chan!e rate trends and the ssues noled n estmatn! "e


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1oreign e"change &orecasting in practice

&ost o* the a--roaches to e%chan!e rate determnaton tell only -art o* the storyOl'e the

seeral blnd*olded men touchn! d**erent -arts o* the ele-hants bodyOand other more

com-rehense e%-lanatons cannot n -ractce be used *or -recse *orecastn!. We do not yet

hae a )ay o* brn!n! to!ether all o* the *actors that hel- determne the e%chan!e rate n a

sn!le com-rehense a--roach that )ll -rode relable short: to medum:term -redctons.

he e%chan!e rate s a -erase and com-le% mechansm n*luencn! and ben! n*luenced by

many d**erent *orces )th the e**ects and the relate m-ortance o* the d**erent n*luences

contnuously chan!n! as condtons chan!e. o the e%tent that trade *lo)s are a *orce n the

mar'et com-etteness s obously m-ortant to the e%chan!e rate and the many *actors

a**ectn! com-etteness must be consdered.o the e%tent that the money mar'et s a *actor the

*ocus should be on short:term nterest rates and on monetary -olcy and other *actors

n*luencn! those shortterm nterest rates. o the e%tent that -ort*olo ca-tal *lo)s matter the

*ocus should be broadened to nclude bond mar'et condtons and lon!:term nterest rates.

Fartcularly at tmes o* !reat nternatonal tenson all other *actors a**ectn! the dollar e%chan!e

rate may be oer)helmed by consderatons o* "sa*e haen.(

ndeed countless *orces n*luence the e%chan!e rate and they are sub/ect to contnuous and

un-redctable chan!es oer tme by a mar'et that s broad and hetero!enous n terms o* the

-artc-ants ther nterests and ther tme *rames.

Wth condtons al)ays chan!n! the m-act o* -artcular eents and the res-onse to -artcular

-olcy actons can ary !reatly )th the crcumstances at the tme. H!her nterest rates m!ht

stren!then a currency or )ea'en t by a small amount or by a lotOmuch de-ends on )hy the

nterest rates )ent u- )hether a moe )as antc-ated )hat subse


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"-rcn! to mar'et( n order to establsh a beachhead or mantan a mar'et share or * the

m-orters or e%-orters had antc-ated the rate moe and had acted n adance to -rotect

themseles *rom t.

Gonetheless those -artc-atn! n the mar'et must ma'e ther *orecasts m-lctly and

e%-lctly day a*ter day all o* the tme. $ery -ece o* n*ormaton that becomes aalable can

be the bass *or an ad/ustment o* each -artc-ants e)-ont or e%-ectatonsOn other )ords a

*orecast n*ormal or other)se. When the screen *lashes )th an une%-ected announcement that

say +ermany has reduced nterest rates by a


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Gearly all traders ac'no)led!e ther use o* techncal analyss and charts. ccordn! to sureys a

ma/orty say they em-loy techncal analyss to a !reater e%tent than "*undamental( analyss and

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that they re!ard t as more use*ul than *undamental analyssOa contrast to t)enty years a!o

)hen most sad they reled many more healy on *undamental analyss.

Ferha-s traders use techncal analyss n -art because at least su-er*cally t seems sm-ler or

because the data are more current and tmely. Ferha-s they use t because traders o*ten hae a

ery short:term tme *rame and are nterested n ery short:term moes. hey m!ht a!ree that

"*undamentals( determne the course o* -rces n the lon! run but they may not re!ard that as

releant to ther mmedate tas' -artcularly snce many "*undamental( data become aalable

only )th lon! la!s and are o*ten sub/ect to ma/or resons. Ferha-s traders thn' techncal

analyss )ll be e**ecte n -art because they 'no) many other mar'et -artc-ants are relyn!

on t. Stll s-ottn! trends s o* real m-ortance to tradersO"a trend s a *rend( s a comment

o*ten heardOand techncal analyss can add some dsc-lne and so-hstcaton to the -rocess o*dscoern! and *ollo)n! a trend.

echncal analyss may add more ob/ectty to ma'n! the d**cult decson on )hen to !e u-

on a -ostonOenabln! one to see that a trend has chan!ed or run ts course and t s no) tme

*or reconsderaton.

&ost mar'et -artc-ants -robably use a combnaton o* both *undamental and techncal analyss

)th the em-hass on each sh*tn! as condtons chan!eOthat s they *orm a !eneral e) about)hether a -artcular currency s oeralued or underalued n a structural or lon!er:term sense

and )thn that lon!er:term *rame)or' assess the order *lo) and all current economc *orecasts

ne)s eents -oltcal deelo-ments statstcal releases rumors and chan!es n sentment )hle

also care*ully studyn! the charts and techncal analyss.

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-&&icial actions to in&luence e"change rates

s n some other ma/or ndustral natons )th *loatn! e%chan!e rate re!mesn the Anted

States there s consderable sco-e *or the -lay o* mar'et *orces n determnn! the dollar

e%chan!e rate.,ut also as n other countresA.S. authortes do ta'e ste-s at tmes to n*luence

the e%chan!e rate a -olcy measures and drect nterenton n the *ore!n e%chan!e mar'et to

buy or sell *ore!n currences.s noted aboe n -ractce all *ore!n e%chan!e mar'et

nterenton o* the A.S. authortes s routnely sterl@edOthat s the ntal e**ect on A.S. ban'

reseres s o**set by monetary -olcy acton.

Go one


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de-end on the de!ree o* substtutablty bet)een assets denomnated n d**erent currences and

on the s@e o* the nterenton o-eraton.

he e%-ectatons or s!naln! channel holds that sterl@ed nterenton may cause -rate

a!ents to chan!e ther e%-ectatons o* the *uture -ath o* the e%chan!e rate. hus nterenton

could s!nal n*ormaton about the *uture course o* monetary or other economc -olces s!nal

n*ormaton about or analyss o* economc *undamentals or mar'et trends or n*luence

e%-ectatons by a**ectn! techncal condtons such as bubbles and band)a!ons.

consderable number o* studes hae *ound no


30/34

n 1983 the Wor'n! +rou- on #ore!n $%chan!e &ar'et nterenton establshed at the

Lersalles summt o* the +rou- o* Seen )arned a!anst e%-ectn! too much *rom o**cal

nterenton but concluded that such nterenton can be a use*ul and e**ecte tool n

n*luencn! e%chan!e rates n the short run es-ecally )hen such o-eratons are consstent )th

*undamental economc -olces.

An


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1le"ible #7s &i"ed e"change rates

$%chan!e rates stablty has al)ays been the ob/ecte o* monetary -olcy o* almost all countres.

$%ce-t durn! the -erod o* !reat de-resson and )orld )ar the e%chan!e rate hae been

almost stable.durn! the -ost: )ar -erod the had brou!ht a ne) -hase o* e%chan!e rate

stablty.

&ost !oernments hae mantaned ad/ustable *%ed e%chan!e rates tll 193. ,ut the

system *aled to -rode an ade


32/34

*le%ble e%chan!e rate ca-tal *lo)s are constraned because o* uncertanty about e%-ected rate

o* return.

Thirdly,the *%ed rate elmnates the -ossblty o* s-eculaton )hereby t remoes the dan!ers

o* s-eculate acttes n the *ore!n e%chan!e mar'et. n the contrary *le%ble e%chan!e rates

encoura!e s-eculaton.

Fourthly ,the *%ed e%chan!e rate system reduces the -ossblty o* com-ette de-recaton o*

currences as t ha--ened durn! 1930s. also deatons *rom *%ed rate are easly ad/ustable.

Fifthly a case s also made n *aour o* *%ed e%chan!e rate on the bass o* e%stence o* currency

areas. he *le%ble e%chan!e rate s sad to be unsutable bet)een the natons )hch consttute a

currency area snce t leads to a chaotc stuaton and hence ham-ers trade bet)een them.

he man ar!uments n *aour o* *le%ble e%chan!e rates

Firstly,*le%ble e%chan!e rate system -rodes lar!er de!ree o* autonomy n res-ect o* domestc

economc -olces as t s not obl!atory *or the coutres to tune ther domestc -olces to *%ed

*ore!n e%chan!e rate.

Secondly *le%ble e%chan!e rate s sel* ad/ustn! and there*ore t does not deole on the

!oernment to mantan an ade


33/34

Fifthly,economsts hae also ar!ued that the most serous char!e a!anst *luctuatn! e%chan!e

rate .e. unceratnty s not tenable because s-eculators themseles create condtons *or e%chan!e

rate stablty. lso the de!ree o* uncertanty assocated )th *le%ble e%chan!e rate could not be

much !reater then )hat the )orld has e%-erenced )th ad/ustable *%ed e%chan!e rate under the

bretton)oods system.

he debate on *%ed 7s *le%ble e%chan!e rate s nconcluse . n*act both systems hae ther

o)n merts and demerts.

33


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Bibliography

,oo's :1. &ana!eral $conomcs by .G. )ed.2. &ana!eral $conomcs by Ehatured.3. &acroeconomcs by R..&sra4. &acroeconomcs by &.B. Seth

Stes C))).*ore%.com))).moneynestment.com
http://www.forex.com/http://www.moneyinvestment.com/http://www.forex.com/http://www.moneyinvestment.com/

22241528 the Foreign Exchange Market

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