Exchange Rates and Macroeconomic Variables

Exchange Rates and Macroeconomic Variables

Exchange Rates and Macroeconomic Variables

Introduction

The exchange rate is a rate of exchanging money between the two countries having different currencies. It is also known as the standing value of the country's currency in comparison with the other country's currency. Today, the international trading is the most important factor where the exchange rates are used and it is not only the important part of trading, but also the investors take advantage of the continuously moving exchange rates and do the currency hedging mostly in the growing currencies like US dollars, UK pound sterling and Euro (Baker & Philip, 2011, p.173). These all are the currencies of developed nations and these currencies continuously make an impact on the world's exchange rates even in the difference of minutes. All the currencies today are backed by US dollar and any fluctuation in US dollar leads to increase differences in the overall currency's exchange rates. The exchange rates are important in various situations i.e. people willing to move in different regions of the world where the country's particular currency is not used. This is the situation where the person had to convert his domestic money in to the foreign currency according to its value is setup (Maurice, 2009, p.435). Exchange rates are an important factor for the country's economic growth i.e. greater the exchange rates for a country, higher growth rates are achieved in the country. It is not a manually adjusted exchange rate in the whole world that whatever the country think can decide its exchange rates, in fact it depends upon various macroeconomic variables that certainly change the scenario of the rates of exchange. In this study, we shall have a strong focus on the macro economic variables like inflation, interest rates, Current Account deficits, public debt, political stability with economic performance and terms of trade. There is doubt about the importance of the significance of these variables according to the theoretical framework. Some statistical tools are used to analyze the changes occur in the variables which will be explained below. The main focus of the study will lead to explain the movements of exchange rate overtime by above mentioned factors and these factors remain significant throughout the movements of exchange rates.

Last 3 decades and exchange rate variations

The importance of exchange rates has been explained above and it has a long financial history but during the past three decades, this fluctuation has been reached to its top as highest variations have been seen in the past thirty years (Maurice, 2009, p.435). The mean Euro rates against the US dollar in the era 1980 - 1990 is almost €1= $1.1, the 10% higher than the US dollar, and that exchange rate is more or less continues till the next decade as well i.e. from 1990 - 2000. After the 9/11, there have been tremendous fluctuations that are started in the exchange rates but these fluctuations did not increase the average increment or decline in the exchange ...