Currencies

What is the difference between a "strong" and a "weak" currency?

A strong currency is one whose value is rising relative to other currencies. A weak currency is one whose value is falling relative to other currencies.

What is the difference between currency devaluation and currency depreciation?

Currency devaluation occurs in a fixed-exchange rate system like China, when the government changes the exchange rate of its currency. Currency depreciation occurs when a country allows its currency to move according with the currency exchange market, and the country's currency loses value.

What factors affect foreign exchange rates?

Factors include differences in interest rates, differences in inflation, budget deficits, public debt, trade policies, capital market equilibrium.

If the U.S dollar weakens, should interest rates generally rise, fall, or stay the same?

More times, when the U.S dollar weakens, the price of imported goods will rise which causes higher inflation, which in turn will put pressure on The Fed to increase interest rates.

What are some ways the market exchange rate between the two country's currencies is determined?

The exchange rate between two countries' currencies is determined by a few factors. One is the interest rates in the two countries. If the interest rate in the home country increases relative to the foreign country, the demand for the home country's currency tends to increase b/c investors can get higher rates of return. The increased demand strengthens the home currency. Also impacting the exchange rate is the expected inflation rates in the two countries. If one country is expected to experience relatively high inflation, in the long run the inflating currency will become less valuable, all else equal.

What is the affect of the US dollar changing in value on US multinational companies?

If the US dollar strengthens, this will have a negative effect on the earnings of US multinational companies. If the US dollar weakens, this will have a positive effect on the earnings of US multinational companies.

If the inflation rates in the US fall relative to Great Britain, what happens to the exchange rate?

If the United States' inflation rate is expected to fall relative to Great Britain, relatively more pounds will be in circulation and dollars will be worth more pounds. This means that each dollar is worth more pounds than before.

If the spot exchange rate of dollars to pounds is $1.60/1 and the one year-forward rate is $1.50/1, would we say the dollar is forecast to be strong or weak relative to the pound?

Since 1 pound costs more dollars now than it will in the future, the dollar is expected to strengthen in the next year.

What is the forward exchange rate?

The forward exchange rate is the price that a foreign currency will cost at some time in the future. A company can enter into a forward contract on exchange rates to help hedge against exchange rate fluctuations in the future.

What is the spot exchange rate?

The spot exchange rate is the rate of a foreign-exchange contract for immediate delivery. Spot rates are the price that a buyer will pay for a foreign currency.

What happens to the US dollar when interest rates change?

When US interest rates rise, the dollar strengthens. When US interest rates fall, the dollar weakens.