Foreign Currency Exchange Rate - Essay Example

? Foreign Currency Exchange Rate Inserts His/Her Inserts Grade Inserts 13 March Frederic Miller (2010) professionally opined The British Government implements the currency exchange rate policies to hurdle inflation, recession, and other significantly influential economic environments. The research focuses on the effects of the change in the British pound in relation to another country’s currency. The research vividly discusses the gain or loss effect of the exchange rate fluctuations in the sale transaction between An American seller and a United Kingdom buyer. Indeed, the currency exchange rate policy must be geared towards leveling the global financial playing field. The prior Bretton Woods agreement and the current United Kingdom government’s policy determined the nation’s currency exchange rate. The variance in the United Kingdom currency in relation to another country’s foreign currency may translates to either a currency fluctuation gain or a loss. Romain Veyrune (2007) reiterated the fixed exchange rate system is defined as a pegged exchange rate. The exchange rate of the nation’s currency is matched to another nation’s currency. Likewise, the nation’s currency may also be matched with a precious metal like Gold. The main purpose of the unique monetary rating system is to make the nation’s currency stable, the British pound, in relation to another country’s pegged currency or precious metal. One of the major purposes of the fixed exchange rate system is to stabilise trading between the two nations. Many companies can make predicting the current and future sales, purchases, and other currency related transaction between country with the currency that is pegged against the other nation’s currency and the country whose currency is used as the basis for the nation’s currency. For example the Chinese currency, Yuan, had been pegged or fixed in relation to the United States currency from1994 until 2005. The Yuan was valued at RMB 8.28 to each United States dollar. After the end of World War II, many other European Union countries adopted the fixed exchange rate system. To bring home the fluctuation issue point, Lawrence Hilbert (2007) stated fluctuations are grounded on the availability of the other country’s supply and demand for foreign currencies to buy or sell goods and services. The electronic currency, e-gold, found in the internet website, www.e-gold.com, is an internationally accepted currency that is pegged or fixed on the value of gold at the time of each sale or purchase of goods or services. Here, the person’s receipt of 20 e-gold currency is pegged the average world market price of gold. As the gold value increases, the value of the 20 e gold currency amount increases; as the gold value decreases, the value of the 20 e gold currency amount decreases. Thus, the value of one e-gold may increase or decrease depending one world value of gold or the demand value of another nation’s currency. Fernando Goncalves (2008) opined the floating exchange rate system is grounded on the economic supply and demand of the nation’s currency in relation to the currency of another nation. Under this system, the currency exchange rate varies depending on the economic situation at the time of the exchange. Under the demand economic principle, the increase in the demand for one currency increases the value of such currency. On the other hand, Callum Henderson (2006) reiterated a decline in the demand for a certain currency generated a decline in the value of such currency. In layman’s terms, a Chinese having a strong need to use the American dollar to purchase American may be willing to “buy” or exchange RMB 10 for each American dollar. On the other hand, the American having a strong need to “buy” or get the Chinese currency, Yuan, can be willing to exchange one American dollar for only RMB 7 for each American dollar. The British pound is based on the fluctuating or supply and demand economic pricing policy in relation to European dollar. The inflation enveloping the United Kingdom pound forced the government to persuade the Bank of England to raise interest rates during 2006 and 2007 years. Consequently, the British pound’s exchange value increase in relation to value of other world currencies. The decline in the world average exchange rate of the American dollar triggered its decline in value in relation to each United Kingdom pound and other foreign currencies. During the first quarter of 2009, the United Kingdom government announced it needed more than 74 billion pounds to pump the British Economy. To achieve the goal, the House of Commons (2009) resolved the British government’s Bank of England governor Mervyn King implementation of the quantitative easing. The easing was preferred because the other alternative, reducing the nation’s average interest rate had already been exhausted to the lowest level, 0.5 percent. Shield Nicholson (2010) theorized the easing alternative effectively halted inflation in the United Kingdom. Inflation forced the United Kingdom government to shift to the use of the floating exchanger rate system. The shift has been very beneficial to the United Kingdom financial status. Kathrin Hagele (2010) emphasized, the British Government implemented the fixed exchange rate system known as the Bretton Woods System after World War II. Feeling the economically disadvantageous effects of the Bretton Woods system under the inflation economic environment, the British Government decided to shift to its current floating exchange rate system. The shift was beneficial to the United Kingdom government. According to Byron Fisher (2007), in terms of supply and demand’s appreciation effect on the British Pound in relation to the United States dollar, changes in the currency exchange rate generates losses to the companies located in countries outside the United States. For example, an American seller sells a product at 100 pounds on February 5, 2011 and collects the payment on April 2011. The decline of the exchange rate of one pound = US $1.6124 in February, 2011 to one pound =US $1.556 will cause the American seller to lose money due to the decline in the value of the American dollar to the tune of ($1.6124 - $1.557) as shown in the appendix. Based on the above discussion, the fluctuation in the United Kingdom currency in relation to another country’s foreign currency may translates to either a currency fluctuation gain or a loss. The variance in the British Pound in relation to another country’s currency will benefit one party. The above exchange rate discussion shows the American seller losing because the United States dollar’s value declined from $1.6124 per British Pound, on sales date, to only $1.557 per British Pound on collection day. Using the same example, the United Kingdom buyer benefitted from the decline in the value of the American dollar to the United Kingdom currency; the buyer pays lesser pounds for the sale after two month. As compared to the British Government’ implements the currency exchange rate policies to hurdle inflation, recession, and other significantly influential economic debacles. Indeed, the currency exchange rate policy must be geared towards leveling the global financial playing field. REFERENCES Fisher, B., (2007) The Supply and Demand Paradox. London, Book Surge Press. Goncalves, F., (2008) Accumulating Foreign Reserves Under Floating Exchange Rates . London, International Monetary Fund Press. Hagele, K., (2010) The Bretton Woods System of Fixed Exchange Rates. London, Grin Press. Henderson, C., (2006) Currency Strategy. London, J Wiley & Sons Press. Hilbert, L., (2007) Currency Interventions, Fluctuations, and Economic Issues. London, Nova Press. House of Commons, (2009) Banking Crisis: Dealing with the Failure of United Kingdom Banks. London, The Stationary Office Press. Miller, F., (2010) Floating Exchange Rate. London, VDM Press. Nicholson, S., (2010) Inflation. London, Biblio Press. Veyrune, R. (2007) Fixed Exchange Rates. London, International Monetry Fund Press. Appendix US Dollar to UK Pound Currency Exchange Forecast U.S. Dollars per one British Pound.  Average of Month. Month Date Forecast Value 50% Correct +/- 80% Correct +/- 0 Feb 2011 1.6124 0.000 0.000 1 Mar 2011 1.600 0.020 0.045 2 Apr 2011 1.557 0.025 0.056 3 May 2011 1.409 0.029 0.064 4 Jun 2011 1.316 0.032 0.071 http://www.forecasts.org/pound.htm Based on the above discussion, the xxxxxxxxxxxxxx The value of the UK pound is currently determined on a floating exchange rate system, but in the past has been determined on a fixed exchange rate system against other currencies. This should be answered in essay style using relevant academic sources (Preferred books) and please consider the word count. Thanks Created:  2011-03-05 05:39  Deadline:   2011-03-15 04:40 Time Left:  2 days 6h 53m Style:  Harvard  Language Style:   English (U.K.)  Grade:   n/a  Pages:  6  Sources:   8  Read More