Examine any foreign currency of your choice (preferably from and emerging market and provide an analysis of that currency against the U.S. dollar over the 5-year period ending with 2010 Introduction Financial markets are often considered to be a dynamic system comprising political, economic as well as social interests…
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Hence, it can be stated that the movements of exchange rates have vital implications over the national economy including its business cycle, trade and capital flows. Additionally, exchange rate is often regarded as an important factor that influences the foreign economic policy of a country by a large extent (Dua & Ranjan, 2011). The paper intends to identify and analyse the Indian Rupee against the US Dollar over the five years period ending with 2010. Macroeconomic Analysis of the Indian Rupee over the US Dollar Macroeconomic fundamentals play a crucial role in the determination of exchange rate. This particular statement can be well interpreted with reference to the microeconomic context and currency fluctuations witnessed in India in the recent years. India has witnessed enormous volatility in the recent decade which has resulted in constant fluctuation of the Indian Rupee against US Dollar. The fluctuation had been quite apparent during the period of 2005-2010 (Somaiya, 2008). For instance, during the year 2009, the Indian Rupee reached 48.32 against the US Dollar which was recorded to be the lowest exchange rate against the US Dollar over the five year period ranging from 2005-2010; while, in 2007, the Indian Rupee was identified to be 41.20 which was again observed to be the highest against the US Dollar for the stated five year period (SignalTrend Inc, 2012). Source: (SignalTrend Inc., 2012) Since 1990, India has made several structural reforms with respect to its foreign exchange related affairs. The major objectives of these reforms were fundamentally to enhance the confidence level among the investors and thereby, maintain a degree of domestic competiveness. Contextually, a major reason identifiable behind the appreciation of Indian Rupee against the US Dollar for the period of 2005-2010 illustrates the occurrence to be a consequence of the increase recorded in the capital inflow of the nation. The FDI equity inflow between 2005 and 2010 was identified to be seven times more than the previous five years i.e. 2000-2004 (Rao & Dhar, 2011). During the fiscal years from 2007 to 2008, the currency exchange rates in almost all the emerging markets including India had strengthened against US Dollar. According to the reports on currency and finance during the aforementioned period, The Indian Rupee was appreciated by 10.2 percent as on March 2009. However, it is worth mentioning that Indian currency, in the five years period, has also depreciated dramatically in certain circumstances. After the occurrence of Lehman’s bankruptcy, the Indian Rupee sharply depreciated, reaching the level of 50 INR/US$, in the month of October 2008. The depreciation in Indian Rupee was primarily attributed with the rise in the price of crude petrol and inflationary pressure prevailing within the country. Moreover, the declining exports and continuous outflow of nat6ional income also contributed towards the depreciation of Rupee and appreciation of the US Dollar (Reserve Bank of India, 2009). It is worth mentioning in this regard that the depreciation of Indian rupee had dramatic impacts upon the economy. Consequently, the depreciation resulted in higher import costs which ultimately lead towards the price rise of import commodities such as crude petrol and i
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