Today’s business world is becoming more difficult and complex because of the important numbers of factors to take into accounts. Then, with the globalisation, more and more firms tends to go global. This trend means that the risks are increasing, and have to be monitoring in order to run well. All the transaction are made with money like investment… But, the main problem is that almost all countries have currencies different from each others. It means that their values are not the same, and they change every time. So, firms have to take into account this problem, because it could no be easy at all.
The aim of this essay is to understand the problem of exchange rate. In order to answer to this problematic, various topics will be analysed. First, the concept of exchange rate will be defined to understand well the topic, then a summary of the movements of the four most used currencies, Dollar, Euro, GBP and Yen and theirs exchange rates over one year. In a second part, the main factors which play a huge role in the fluctuation will be explain and, more precisely, an explanation on the movement that appeared on the graph of the first part. Finally, a brief commentary about Elecdyne’s recommendation to sell from a country to another.
Let’s start with the definition of exchange rate. According to investorwords. com, it means «Rate at which one currency may be converted into another. The exchange rate is used when simply converting one currency to another (such as for the purposes of travel to another country), or for engaging in speculation or trading in the foreign exchange market. » Thus, the exchange rates movement are very important and have to be monitoring in order to avoid cash loss. In order to study the exchange rates movement, the currencies will be analysed over a year, one with the others.
The period of time is from October 2009 to OCtober 2010. Evolution of the GBP: Let’s start with GBP. On this graph showing the movement between Euro and GBP, the curve’s trend is increasing from october to July with a quick acceleration at the end. Then the curve is stable until October where it decreases. The highest point is in July and the lowest in October 2009. It means that at the beginning of the year, British should have invested in Euro countries. [pic] On this graph showing the movement between USD and GBP, the value is decreasing from October 2009 to May/ June 2010.
Then, the curve increases to catch up almost the value at the beginning of the year. The lowest point was in May 2010 and the highest one was in November 2009. For British investors, the best period to buy or invest was at the beginning of the year. [pic] This curve shows the relation between the Japanese Yen and the British pound which is only decreasing during the year. It means that the GBP looses its value. The lowest level reached at the end of september and the highest point in October 2009. It means that it wasn’t a good year for British to invest in Japan this year.
The evolution of Euro. Let’s continue with the Euro. This curve has not the same trend as the previous one, from October to June, the curve is decreasing, with a massive one in May/June. Then, it increases with a little fall until October 2010. The highest point is in December and the lowest one is in June. For European investors, the most profitable period of time was at the beginning of the year to trade in the Dollar market. After January, it’s not really a good investment. [pic] This graph shows the evolution between GBP and Euro. The curve’s trend is to decrease along the year.
But in september, Euro looses a little of its value so it becomes higher. The lowest point is reached in July and the highest in October 2009. [pic] This graph is quiet like the two other graphs about Euro, which means that the trend is to decrease over the year with fast decrease, even if at the end of the year it starts again but not big as the beginning. The lowest point is in September and the highest is in October 2009. The beginning was a good time to invest in Japanese product, market for European. Evolution of Dollar. It’s now the Dollar which is studied.
On this first graph showing the exchange rate movement between Euro and Dollar, it is clear that from November to June the increase was very important, and decreases very fast too until the end of the year. The lowest level is reached in november/december 2009 and the highest in June 2010. On this graph, Dollar is compared with the GBP. From the beginning of the year until May, the curves is increasing and reaches its highest point in May/June. After that, it decreases until the end of the year, and looks like to become stable. To make trade in UK, the most profitable period was in May/June for American’s investors. pic] Instead of the two previous graphs, which were first increasing and then decreasing. This curve is only decreasing all over the year. Its highest point is reached in May 2010, and the lowest in October 2010. This year wasn’t good for American investors who wanted to make to make trade in Japan. Evolution of Japanese Yen. Let’s continue with the Yen. Here is the movement between Euro and Yen, from October to May, the curve is increasing with a very fast growth at the end of April/beginning of May. Then, generally, the curve stays stable.
The lowest point is in October 2009 and the highest is in September 2010. For Japanese buyers who want to order European product, this year should have been profitable, because if they have ordered in October 2009 and make the transaction in September, they should have made a positive profit. [pic] Here is compared Yen with GBP. The global trend of the curve is to increase, the lowest point is reached at the end of September and the highest is reached at the end of May. Japanese investors should put money in UK in September by buying products or something else to increase their margin.
This curve has the same trend as the two previous. During all the year, the Yen’s value has increase. The highest point was at the end of September and the lowest one in April 2010. Japanese investors should have invest at the end of September in the United States’s product to earn more and have the best profitability. After this summary about the different exchange rates movement, let’s see what are the main factors which influence the exchange rates movement. And a brief explanation about the factors which have played a huge role following the countries.
The financial world is too large and complex to develop each factor affecting it. So let’s explain the important one. One of the factor affecting the exchange rate of a country is the supply and demand in the currency of that country on the international exchange markets. For example, Dollar is the currency, if the demand for Dollar exceeds supply, its value will rise. And if the supply exceeds demand, its value will go down. Another huge factor is the interest rate. If a country has a bigger interest rate than the others countries, the investors would prefer to put their money in this market.
Because the rentability will be higher. Thus, the demand for this currency will increase. The inflation rate of a country is also a big factor. If a country has a big inflation rate, investor won’t agree to put their money in this country, even if the interest rate is higher, because there is a chance that the currency would decrease. The trade balance of a country is also important. If the exportations are bigger than the importations, the trade balance will be positive, so the exchange rate of the currency will increase because investors would be confident in this market.
On the contrary, if the trade balance is negative, the exchange rate will decrease because investors would be afraid. The government policy about taxes is another factor. If taxes are increasing, people of this country will consume less goods and it will decrease the value of the currency. Moreover, the government could put taxes on foreign investment. Speculation is also a factor, psychological one. If investors think that the GBP (for example) will rise in the future, they will buy it to make a future benefit. The contrary is also true. «Change in competitiveness» is another Factor.
If US goods become cheaper and more attractive, it will rise the exchange rate for the Dollar. (Factors which influence the exchange rate) The public debt is also an important factor. If the financial situation of a country is bad with a huge national deficit and debt, this country won’t be an interesting placement for the investors. Because deficit and debt encourages inflation. (Jason Van Bergen) The last factor is the political stability and war of risk are an important factors because people are afraid to invest in a country where they can loose all their money cold turkey. Jason Van Bergen) After this list of important factors that influenced the exchange rates market, let’s see some particular events on the period studied for each currencies: – The financial worldwide crisis has affected all countries in the world and created problems like unemployment, increase of the debt… – The value of GBP fell because of different factors in 2009/10. – Its interest rates are too small compared to the inflation. – increase of the public debt (which still remains under the EU demand)