DOLLAR IN GLOBAL CURRENCY MARKET.   Term Paper ID:22152 Click to get this paper

Essay Subject: Position related to other currencies, background, devaluation, effect on trade, reserves, interest rates, future.... More...

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Paper Abstract: Position related to other currencies, background, devaluation, effect on trade, reserves, interest rates, future. Paper Introduction: Currency takes on a life of its own in the international trading markets. Aside from the value that governments place on their currency, international traders place value that ultimately determines how much any given currency can buy. In recent months, there has been increased attention given to the volatility of the world's currencies, with particular attention given to the American dollar, the Japanese yen, the Deutchemark, and the Mexican peso. This research examines the recent devaluation of the American dollar, the recent performance of the British pound and potential ramifications on the American and world economies. The Japanese yen, German mark and American dollar are generally considered the world's strongest currencies (Petruno, 1995, p. D3). Merchants and governments expect these currencies to re Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. Journal of Commerce and Commercial, p. However, the Fed has increased interest rates seven timessince the beginning of 1994, which has had the desired effect of slowingdown the economy and preventing inflation. Americaninvestors are diversifying their own portfolios, with the result thatalthough they hold only three percent of their assets in foreign securities(compared to 25 percent for British investors and 1 percent each forGerman and Japanese investors), they are moving out of their own country'sformerly nearly exclusive hold on the investment community. The increase in interest rates would cause investorsto be attracted to the dollar and to invest in American governmentsecurities. There are several candidates which could assume the dollar's currentrole as the dominant currency. During the 198 s, the United States saw its portfolio and foreigndirect investment turn from a net inflow to a net outflow. In early1994, the British reduced interest rates by .25 points, in part becausethe inflation rate in the United Kingdom was running lower than thegovernment expected. Journal of Commerce and Commercial, pp. Investors send stern message via devaluations. However, the result was that the pound fell againstboth the mark and the dollar, further weakening the nation's long-termprospects. When traders move from one currency to another, the currency beingsold is devalued. 88). Until World War II, the pound served the role as the world's leadingcurrency. These devaluations can be devastating for investorsstill holding this currency, with the result that traders typically try toexit particularly volatile and vulnerable currencies before suchdevaluations occur. The Chinese yuan is also a strong candidatesince it is expected that China will surpass America's output and tradewithin 2 years; however, the financial markets within China are not yetsophisticated enough to support the yuan's role as a reserve currency("Will the Buck," 1994, p. It is the effect on trade that causes concern when a major currency,such as the dollar, falls in value (Zimmerman, May 11, 1993, p. This represents a long-term view of the currency market,since a health economy will eventually attract investors back to the pound. As such, it was a net international creditor and enjoyed lowinflation and relative financial stability as a result. The Japanese yen, German mark and American dollar are generallyconsidered the world's strongest currencies (Petruno, 1995, p. It is not merely the dollar which is suffering from devaluation; theBritish pound has suffered devaluation over the last several years, aswell. Futures, p. Within the American economy, this can be an inflationaryfactor since American producers may increase their prices to keep pace withthe Japanese goods (Zimmerman, March 24, 1994, p. At the sametime, American and foreign investors have discovered emerging markets as anopportunity which can offer higher rewards than dollar-based transactions.This has also contributed to the fall of the dollar. The yen is certainly a strong currency, andJapan's role as an economic giant is clearly expanding. In recent months, there has been increasedattention given to the volatility of the world's currencies, withparticular attention given to the American dollar, the Japanese yen, theDeutchemark, and the Mexican peso. In addition, because the American dollar ispervasive in global transactions, there is a very real danger that itsprecipitous fall could have disastrous results for the global economy inthe short-term. At the same time,the European Union has a larger economy and, taken as a whole, is a largertrader than the United States. Theworld's strong economies, those with budget surpluses, trade surpluses andlow inflation, attract more investment and thus enjoy stronger currencies. 2A.Petruno, T. Currently, the dollar accounts for 61 percent of the world's foreignexchange reserves, and more than half of the world's private wealth.Nearly two-thirds of the world's trade is transacted in dollars, and three-quarters of international bank lending is also handled in dollars. As acurrency falls, that nation's exports become less expensive relative togoods from nations with strong currencies. D3.Platt, G. In the current situation, the Japanese government iscalling on the Clinton Administration to increase interest rates and reducethe budget deficit. 2A. The international community generally espouses the idealof stable exchange rates, because of the benefits to trade, but individualnation's economic conditions make this a difficult goal to achieve. Los Angeles Times, p. 2 ). (1995, January 13). Dollar falls as UK pound, deutsche mark advance. While there are othercandidates which could become a reserve currency, none are currently strongenough to assume that role. If the Japanese were to takemeasures to reduce the attractiveness of their currency, more investorswould be attracted to the dollar. 1A, 8A.Will the buck stop here? Journal of Commerce and Commercial, p. UK interest-rate cut undermines the pound. Dollar rallies as mark, pound slide on labor, political woes. (1994, October 26). Record dollar low sparks surge in import prices. At the same time, the American government is calling onthe Japanese (for example) to take steps to reduce the high valuationassociated with the yen. 88.Zimmerman, A. Conversely, imports fromnations with strong currencies increase in price relative to domesticgoods. Journal of Commerce and Commercial, p. 2 .Gorman, V. There is now the question as to whether the dollar is in danger ofsuffering a similar fate. ReferencesCross up. (1994, February 9). However, there is some doubt as to how long the pound will be permitted tofall, and also as to the relative strength of other currencies, such as theyen and the mark ("Cross Up," 1994, p. This research examines the recentdevaluation of the American dollar, the recent performance of the Britishpound and potential ramifications on the American and world economies. However, it should be noted that the traders in thecurrency market are not only professional investors and managers ofinvestment funds; entire governments invest in other government'scurrencies, with the result that poor investments can be substantiallynegative. The risks to the American economy should the dollar lose its status ofbeing the de facto reserve currency of the world begin with the transactioncosts and exchange-rate risks that its manufacturers will have to bear oncethey are no longer able to use the dollar for foreign transactions. Inaddition, there are likely to be higher interest rates within the Americaneconomy since the currency would no longer have the appeal of a "safe"investment. 2A.Zimmerman, A. Instead, interest rates would be used to attract investorsfrom the global markets, requiring slightly higher rates than currentlyexist. Where the United States has increased interest rates, mainly to keepits own recovery from getting out of hand, but also to shore up the dollar,Britain has chosen to let its currency fall on the world market. It may be that the demise of the dollar as a reserve currency isinevitable, but the speed with which that occurs is critical to not onlythe American economy, but to the world economy. (1994, November 12). There are steps that countries can take to shore up their currencies.For example, in 1993, Europe permitted its Exchange Rate Mechanism tocollapse, which permitted the various currencies on the continent tofluctuate (Petruno, 1995, p. 88). In this way, the current devaluation of the dollar results in theapparent increase in prices of Japanese goods relative to American goods inthe world market. Currency takes on a life of its own in the international tradingmarkets. (1994, August). 2A). Overall, analysts expect that the British pound will continue to fallagainst major world currencies as the nation seeks to maintain a healthydomestic economy. Because of this effect on trade, there can be pressure from tradingpartners for countries whose currency is falling to take steps to shore upthe currency value. If those nations create a single currency,it may well become dominant. D3).Merchants and governments expect these currencies to remain relativelystable, and often conduct business using these currencies rather than theirown (this was a particularly common practice in the former Soviet Union,where the ruble was often not accepted for international transactions).Investors count on these currencies to provide a "safe haven" when othercurrencies fluctuate wildly, providing the traders with strong options forplacing funds. 88). 1A). To continue to increaseinterest rates may well plunge the economy into a recession, which wouldstill leave Japanese goods in a questionable state since most consumerswould be unwilling (or unable) to purchase them (Platt, 1994, p. The United Kingdom is committed to keeping inflation rates lowrather than in keeping its currency strong (Gorman, 1994, p. Economist, p. Thesefigures are down somewhat from the 197 s, when the dollar accounted for 8 percent of the world's reserves, yet the dollar is far more important inthe world's economic affairs than the strength of the American economywould apparently warrant (since American exports have fallen to 14 percentof the world total and total American output is now 2 percent of theglobal total) ("Will the Buck," 1994, p. After World WarII, the pound's role as the leading currency fell as its foreign assetsfell. 2A). (1994, March 24). D3). However, the United States is likely to be reluctant to increaseinterest rates in the short-term, given that rates have increased so muchin recent months. This comes from the idea that the dollardevaluation is happening just as the yen is gaining in popularity, andthere are two parts to this equation. The result at that time was that Swedenand Britain (among others) let their currencies fall in value while theGerman mark rose. (1993, May 11). Aside from the value that governments place on their currency,international traders place value that ultimately determines how much anygiven currency can buy. Some analysts predictthat within another 15 years, emerging markets will compose between 4 and45 percent of the world's capitalization (a significant increase fromtoday's level of 15 percent) ("Will the Buck," 1994, p. 2A). If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.

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