International Finance



International Finance

Introduction

International finance is the branch of international economics that deals with a variety of issues that are related to macroeconomic behavior, such as the determination of real income and the allocation of consumption over time, in a country that engages in international trade. As such, this field of study is also often referred to as international macroeconomics. Specific topics included in international finance include the balance of payments, exchange rate determination, and macroeconomic policy in an open economy. At the heart of this field is the fact that international economic activity between and among nations seldom, if ever, is perfectly balanced. Therefore, financial resources will tend to flow across borders. The core of international finance is the study of these flows, the markets where this activity takes place, the impacts these flows have on economic behavior, and the interaction between these flows and economic policy.

`Currency

Currencies are like any other commodity; they are used and traded either for speculation, investment or as a medium of exchange. Currencies rise and fall because of basic supply and demand. Speculation, investments or economic activity all contribute to it.

Fluctuating Currency Value

A country's currency does not always mirror economic conditions, a country may have a very robust economy but its currency may remain weak relative to other currencies. A weak economy can also deliver a strong currency depending on current factors but how is it done? The answer lies in speculation, everyday, currencies are traded against each other relying mostly on technical factors than its fundamentals. If a currency's value drifts far away from a country's economic objectives, whether ithas become too weak or too strong as a result of free market trading, the government steps in and artificially rebalances supply and demand (Mundell, 2005).

Factors Affecting currency value

Macroeconomic

A currency that is weakening means that there is too much supply in the market, a governing body can attempt to reverse this by making their currency a lot more expensive to acquire such as raising interest rates which in turn makes the currency harder to borrow. This move can either work or not because a higher interest rate also weakens economic activity that may further push the currency lower.

A strengthening currency can be reversed through government intervention by flooding the market with more currency. This is done by decreasing interest rates or issuing new government bonds. This strategy has a higher success rate than attempting to strenghten it because these tactics contribute to inflation which makes a currency fall in value very fast. However, depending on the interpretation of the speculating herd, a weaker currency means cheaper export prices which can increase the demand for the currency. Currencies rise and fall in value because of multiple factors that can be interpreted differently by traders, investors or the government (MacDonald, 2007).

Economic situation is also a factor- It includes factors likes' unemployment, jobs, ethic, works, inflation and the direction of economy. It is newer or older in orientation, high tech and computer or farming and ...