Exchange rate Presentation good to have for keeping.pptx

it is important to know the difference between exchange rate and some other variables in economy.

1. بسم الله الرحمن الرحیم Ministry of Higher Education. Kabul University Economics Faculty Finance and Banking Department. Determinants of Exchange Rates Lecturer: Presented by:

2. What is Exchange Rates ? Definition: Definition: The exchange rate is the price of one currency in terms of another (e.g., 1 USD = 85 AFN). Importance: Determines international trade competitiveness, investment flows, inflation, and purchasing power.

3. Types of Exchange Rates: Fixed Exchange Rate: Pegged to another currency or basket of currencies (e.g., USD peg). Floating Exchange Rate: Determined by market forces of demand and supply (e.g., AFN/USD). Managed/Flexible: Central bank occasionally intervenes to stabilize.

4. Determinants of Exchange Rates: Inflation Rate: Countries with low inflation usually experience currency appreciation. High inflation weakens purchasing power, leading to depreciation.

5. Cont … Interest Rates: Higher interest rates attract foreign capital → appreciation. Lower rates discourage investment → depreciation.

6. Cont... Balance of Payments: Surplus (exports > imports) raises demand for currency → appreciation. Deficit (imports > exports) increases demand for foreign currency → depreciation.

7. Cont … Government Debt: High debt may discourage foreign investors due to default risk. Can cause depreciation unless debt is used productively.

8. Cont … Political Stability & Economic Performance: Stable countries attract foreign investment → stronger currency. Instability, wars, or crises → weaker currency.

9. Cont... Speculation: If investors expect appreciation, they buy now → appreciation. If they expect depreciation, they sell → depreciation.

10. Cont … Central Bank Intervention: Central banks may buy or sell their own currency. Used to stabilize or influence exchange rate.

11. Cont … Terms of Trade: If export prices rise relative to imports, revenues increase. This strengthens demand for currency → appreciation.

12. Part 2 Importance of Determinants of Exchange Rates

13. By the time Bretton Woods system broken down in 1970s. Many countries introduced floating exchange rate system. Jeffery Frankel US Economist developed an empirical methodology in 1979, which explained variations in the exchange rate between countries with the help of Money Supply, Industrial Production, Interest rate and Inflation differential between countries. The model he used is called RID (Real Interest Deferential). He tested DM/USD rate between the years 1974-1978. The model explained over 80 percent of the exchange rate between US and Germany.

14. Importance of Determinants of Exchange Rates: Understanding the determinants of exchange rates is important because it allows businesses, policymakers, investors, and individuals to anticipate currency movements, make informed decisions, and manage economic risks.

15. 1. For Policymakers: Reason: Helps design effective monetary and fiscal policies . Impact: Understanding factors like inflation, interest rates, and trade balance enables central banks to stabilize the currency and control inflation. Example: If high inflation is causing currency depreciation, the central bank can adjust interest rates or intervene in exchange markets.

16. 2. For Businesses and Exporters: Reason: Exchange rates affect profit margins and competitiveness . Impact: Helps companies plan pricing strategies, sourcing, and hedging strategies to minimize losses due to currency fluctuations. Example: An exporter can hedge against a weakening domestic currency to protect profits.

17. 3. For Investors and Financial Markets: Reason: Exchange rates affect returns on foreign investments . Impact: Investors can manage risks, choose profitable markets, and avoid losses caused by currency volatility. Example: A foreign investor in Afghan bonds monitors AFN trends to decide entry or exit points.

18. 4. For Individuals: Reason: Affects purchasing power, remittances, and travel expenses . Impact: Helps you plan your spending and saving, especially when buying things from other countries or doing business internationally. . Example: Knowing that AFN is likely to depreciate, a person might convert currency early to avoid paying more later.

19. 5. For Economic Planning: Reason: Exchange rate knowledge is crucial for national economic stability . Impact: Helps forecast trade balance, capital flows, inflation, and economic growth.

20. Conclusion: Exchange rates are affected by a combination of economic, financial, and political factors. Key determinants include inflation, interest rates, trade balance, debt, stability, and growth. Understanding these helps policymakers, investors, and businesses manage risks effectively and positively.

21. Thanks for your precious time.