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19

International currency markets are highly liquid, with near-instant transfer of knowledge between trading centres. This means that any arbitrage opportunities tend to get resolved within seconds. To put it simply, the thing you tried to do, of trading two currencies via a third, is something that lots of real-world currency traders, and their automatic ...


14

There are several exchange rate concepts that need to be distinguished. There are bilateral and multilateral (aka "effective") exchange rates, nominal and real exchange rates, and market-price versus PPP (purchasing power parity) exchange rates. Let's start with the simplest concept: A bilateral nominal exchange rate, e.g., 117 yen/(US dollar), 0.8 pounds/...


13

The Euro was always conceived by most Economists as a political goal, not an economic one. Prologue: There is the theory of Optimum Currency Areas (OCA) which characterizes properties that a larger area would need to have if it were to operate on a single unit of currency. Since the announcement of the Euro around 1990, there were many papers that looked ...


11

Typically, a devaluation is achieved by selling the domestic currency in the foreign exchange market and buying other currencies. Suppose China sells one trillion Renminbi and buys 157 billion US dollars. From the point of view of the market, it is as if the supply of Renminbi just increased. As in any competitive market, an increase in supply will cause the ...


9

Some major benefits include: Seigniorage on currency acts as a source of government revenue, allowing for lower taxes and higher spending. One paper (Neumann (1992)) puts this at about \$15 billion a year. Lower borrowing costs on public and private debts due to greater demand for financial assets denominated in the currency, particularly credit risk-free ...


8

Effectively RER is calculated by converting currency from Country A to country B first, than purchasing the same goods in Country B, whereas PPP is the ratio of the price of goods in each country. From the Wikipedia article: If all goods were freely tradable, and foreign and domestic residents purchased identical baskets of goods, purchasing power ...


8

Swiss people do shop outside of their border, exactly as you think they should: "Even the Swiss are staying away from their local stores and products—they would rather buy from neighbouring countries and take advantage of the situation. Switzerland is bound by Germany, France and Italy, and most of its big cities are located just at the border. It is ...


8

Technically you are changing the BDT/USD exchange rate, or at least you're changing one of the reasons. If supply/demand changes, the value of a particular currency is going to change as well. But there are other factors - interest rates and political climate also affects the rate. To give you an example, Venezuela is now going through some rough times, ...


5

The closest we can get to an answer would be by looking at previous exits from currency unions. Rose published a paper studying extensively all exits after WWII. The abstract resumes well the conclusions of the paper: This paper studies the characteristics of departures from monetary unions. During the post-war period, almost seventy distinct ...


5

There isn't a typical answer. The vendor may want paying in whatever currency represents the highest proportion of their costs, as this reduces their currency risk. But there may also be restrictions on what currency they can trade in; how much of some particular currency they're allowed to hold; there may be capital controls in place; some currencies ...


5

To maintain the currency peg, the Hong Kong Monetary Authority (HKMA) has to buy HKD and sell USD when the currency comes under depreciation pressure and sell HKD and buy USD when the currency comes under appreciation pressure. Depreciation pressure: The HKMA operates a currency board, which means that more than 100% of outstanding HKD is backed by USD ...


4

From a central bank's point of view, printing money isn't free. Each 1 CHF created costs exactly 1 CHF - that is, it appears on the bank's balance sheet as a liability. They owe that 1 CHF to someone (the person they bought the Euros off - a bank). And whenever you owe someone money, there is always the ultimate belief that you can pay it back. Lose that ...


4

Just to synthesize the other two answers together a bit and "join-the-dots". Setting the Scene Since 2011 SNB had decided that it wanted to prevent the CHF from strengthening past 1.2 CHF per EUR. In order to do this it had to do either or both of: Discourage people from buying CHF. One way to try do this is to keep rates low. Sell CHF by the bucket ...


4

In your last paragraph you write "high interest rate in Country A". There is no such thing. There is higher interest rate, per some given criterion. Say higher than historical average. In out case, it is "higher interest rate in Country A compared to the interest rate in Country B". So your last paragraph says that if returns (from nominal interest rates) ...


4

The Mexican government has a complicated history of currency intervention, which can be read about in a detailed timeline here. However, in 1994 the devaluation was caused by the end of government intervention. Up until that date the Mexican government had a set range of USD values that the peso could float within, so a sort of flexible peg to the USD. In ...


4

Buying and selling of currencies in Argentina is currently strongly controlled by the government: http://www.reuters.com/article/2015/02/09/argentina-imports-idUSL5N0VJ4I520150209 This means that you cannot buy as many Dollars as you want, but the ones you buy you get at a government controlled exchange rate, which is actually cheaper. The Argentine ...


4

Note that I am not 100% sure. But in my understanding, we have Year 1 Price for a product in the US : $p_{US}=v$ \$ Exchange rate: $x$ pesos for $1$\$ Price of the product in the Philipines: $p_{Ph})=v.x$ pesos Year 2 Price for the same product in the US : $p^\prime_{US} = (1+\alpha_v)v$ \$. The price increased due to the inflation $\alpha_v$. Nominal ...


4

Suppose that there is no 45 percent tariff and the market is in some kind of equilibrium. That is the demand for yuans equals the supply of yuans at the current exchange rate. Now assume Trump does impose a 45 percent tariff. This makes imported Chinese goods in the US more expensive for the American consumer. As a result the consumers will buy fewer ...


4

As there is no practical limit on the number of cryptocurrencies that can be created, and as no one crpytocurrency has a unique advantage over any other, and as no cryptocurrencies are legal tender anywhere, the theoretical market cap of any one cryptocurrency has zero underlying value. What its actual market cap is, will depend on how many suckers can be ...


3

After a period of time they would switch back. Why? The monetary systems of each country are based on fractional reserve banking, which creates a leveraged relationship between currency and deposits within the banking system. Both forms of money are used interchangeably for purchases, although in practice the use of bank deposits dominates in modern ...


3

In general, real output is calculated like this: $$RGDP_{t, b} = NGDP_t \cdot p_{base} / p_t$$ Where $NGDP_t$ is nominal GDP at time t, $p_t$ is the price level in time $t$ and $p_{base}$ is the price level in the base period. To covert RGDP between base periods, note that the ratio to a common year's $RGDP_t$ in two different base years is: $$RGDP_{t, b1} ...


3

This question is heavily reliant on the context of when it was asked. A lot has happened since February with respect to the Australian Dollar. A currency devaluation can be caused by quite a few factors. In the case of Australia, the devaluation is occurring with respect to the USD. The AUD remains strong but the US is currently experiencing a surge in ...


3

This is a constant source of confusion in international macreconomics. There are two ways to define the exchange rate. $$E = \frac {\text {home}}{\text{foreign}}$$ Here, we express "units of home currency per unit of foreign currency" (or basket of foreign currencies). In this definition $$E \uparrow \Rightarrow \text {home currency depreciates}= \text {...


3

If the Phillipine peso falls in value against the USD by 5% in a year, but the domestic inflation rate in the Phillipines is 10%, compared to 2% in the USA, the nominal exchange rate has fallen (by 5%), but the real exchange rate has risen by 3%.  Could anyone help me explain why "the real exchange rate has risen by 3%."? A Word of caution: it is ...


3

The gold standard in the US was actually kind of complicated. You had the government issuing notes off of gold, and private banks issuing bank notes off of gold...but also banks issuing notes/deposits off governments notes as well. A pyramid on a pyramid. Neither was 100% backed and both were vulnerable to runs. In 1933, FDR no longer let the public ...


3

I don't think that it is legal in all countries, but the central bank can also print more money and give it to the government, which in turn can use it to pay the state debt. This will cause inflation, since there is more money representing the same goods and services. Inflation will cause the money to devalue.


3

A higher than expected interest rate in the US would result in a higher than expected interest rate differential with other currencies. This will drag more money to the US as investors will try to benefit from this higher interest rate. Moreover, a faster tightening may create the perception that the Fed is more confident about the economic environment. This ...


3

TL;DR Version: The trust that money has value gives it its value. If money can be exchanged for gold, then this makes people trust that it will have value. If this is not the case (and it is not, although it used to be the case almost everywhere) then the only thing that can make people trust that money will not lose its value through extreme printing of ...


3

Buy and sell rates are different because the currency vendor wants to make a profit and is also taking some risk with the exchange. It is possible that she cannot unload all the CADs they buy from you immediately and then perhaps in the future they will depreciate. (Perhaps they will appreciate. It is uncertain, hence there is risk.) The same applies to ...


3

The recent shift was likely two major interrelated reasons: First, there was already relatively high uncertainty regarding the future viability and value of the currency (as @zeta-band noted, they're already incurring high deficits). Second, Erdogan has made statements suggesting that, if re-elected, he'll take more direct control over the central bank. ...


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