Aishhhh…. IFM current exchange rate .pptx

Current exchange rate

1. Sahyadri Commerce and Management College, Shimogga CURRENT EXCHANGE RATE AGREEMENT Presented By: Ayisha E II MBA

2. CURRENT EXCHANGE RATE AGREEMENT A current exchange rate agreement or regime refers to how countries manage their currencies in relation to each other. The features and details of these agreements vary depending on the type of regime, but the following are common aspects that define such agreements:

3. 1. Fixed or Pegged Exchange Rate Definition: A country fixes its currency’s value to another major currency (e.g., USD, EUR, or gold) or a basket of currencies. Features: Stability: Reduces exchange rate volatility, which promotes international trade and investment. Government intervention: Central banks must actively maintain the fixed rate by buying or selling currency in the forex market. Loss of monetary policy independence: Countries with a fixed rate may have limited control over domestic monetary policy, as they must maintain reserves to defend the peg. Example: Hong Kong pegs its currency to the U.S. dollar.

4. 2. Floating Exchange Rate Definition: Exchange rates are determined by the free market based on supply and demand, with minimal government intervention. - Features: Flexibility: Allows currency to adjust according to market conditions, which can absorb external shocks. Monetary policy independence: Central banks can focus on domestic inflation and economic growth. Volatility: Currency values may fluctuate widely, potentially leading to instability in international trade. Example: The U.S. dollar, euro, and yen all float freely in international markets.

5. 3. Managed or Dirty Float Definition: A hybrid system where a currency generally floats, but the central bank may intervene to stabilize or direct its value. - Features: Targeted intervention: Central banks may intervene during excessive volatility or when the currency deviates from a desired range. Flexibility with oversight: Offers some market-driven flexibility but retains central bank control for stability. Example: India and Singapore have a managed float regime.

6. 4. Currency Board Definition: A stricter form of the fixed exchange rate where a country commits to exchanging its currency at a fixed rate for a foreign currency, backed by reserves. Features: Stability: Provides more credibility than a traditional fixed rate, as the board is legally bound to hold reserves. Currency stability: Guarantees exchangeability with the anchor currency. Limited flexibility: The government loses control over independent monetary policy since the supply of money is tied to foreign reserves. Example: Hong Kong operates under a currency board system linked to the U.S. dollar.

7. 5. Currency Union Definition: Multiple countries adopt a single currency or a set of closely aligned currencies. Features: Eliminates exchange rate risk: Between member countries, promoting trade and investment. Shared monetary policy: Centralized by a common authority, such as the European Central Bank (ECB) for eurozone members. Loss of independent monetary control: Individual member countries cannot implement their own monetary policies. Example: The Eurozone, where member countries use the euro.

8. 6. Currency Swap Agreements Definition: Bilateral agreements between central banks to exchange currencies to stabilize markets and support liquidity in times of crisis. Features: Liquidity provision: Ensures access to foreign currency in times of need, especially during economic crises. Stabilizes exchange rates: Prevents sharp fluctuations by providing short-term financing. Temporary nature: These agreements are usually time-bound and aimed at specific situations. Example: The U.S. Federal Reserve has currency swap lines with central banks such as the European Central Bank and the Bank of Japan.

9. Key Details to Consider Market Intervention: Some regimes require central banks to maintain reserves and frequently intervene in currency markets. Monetary Policy: Countries with fixed exchange rates often sacrifice control over domestic monetary policy. Risk of Currency Crises: Pegged or fixed regimes may face speculative attacks if market participants believe the peg is unsustainable. Impact on Trade: Stable exchange rates generally promote international trade and investment, while volatile rates may deter foreign investment.

10. Conclusion Overall, the current exchange rate framework allows for flexibility and stability in many developed economies but presents challenges for emerging markets. Managing this balance between flexibility and stability remains crucial for future global economic coordination.