Question about International Economics... | Forex Factory

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Question about International Economics...

  • #1
  • First Post: May 1, 2006 12:33pm May 1, 2006 12:33pm
I have been reading posts on this forum and information from Investica about the economic implications of having a rapidly growing currency and that it can be negative and looked down on. I have a couple of questions:

1- Why would a country not want it's currency to be as highly valued as possible? The statement was made that finance ministers over the Euro might look down on such high recent gains. Why?

2- I have pieced together an idea of what the G7 is but why would a country be so concerned about what other countries throught about its currency? It would seem to me that every country would want it's currency to be as highly valued as possible and would not let other countries put pressure on them to keep the conversion on their currency down.

3- If there are benefits to not allowing a country's own currency to grow to rapidly, what are the benefits?

Thanks in advance for any education on this matter. I have always thought that higher is always better but I guess there must be some reasons why that isn't always the case.
  • #2
  • May 1, 2006 1:06pm May 1, 2006 1:06pm
Quoting jimsasya
I have been reading posts on this forum and information from Investica about the economic implications of having a rapidly growing currency and that it can be negative and looked down on. I have a couple of questions:

1- Why would a country not want it's currency to be as highly valued as possible? The statement was made that finance ministers over the Euro might look down on such high recent gains. Why?

2- I have pieced together an idea of what the G7 is but why would a country be so concerned about what other countries throught about its currency? It would seem to me that every country would want it's currency to be as highly valued as possible and would not let other countries put pressure on them to keep the conversion on their currency down.

3- If there are benefits to not allowing a country's own currency to grow to rapidly, what are the benefits?

Thanks in advance for any education on this matter. I have always thought that higher is always better but I guess there must be some reasons why that isn't always the case.
In a nutshell,

Lower Currency Value effectively makes them a "Discount Store" in the Global Village Mall.
  • #3
  • May 1, 2006 1:44pm May 1, 2006 1:44pm
Quoting jimsasya
I have been reading posts on this forum and information from Investica about the economic implications of having a rapidly growing currency and that it can be negative and looked down on. I have a couple of questions:

1- Why would a country not want it's currency to be as highly valued as possible? The statement was made that finance ministers over the Euro might look down on such high recent gains. Why?

2- I have pieced together an idea of what the G7 is but why would a country be so concerned about what other countries throught about its currency? It would seem to me that every country would want it's currency to be as highly valued as possible and would not let other countries put pressure on them to keep the conversion on their currency down.

3- If there are benefits to not allowing a country's own currency to grow to rapidly, what are the benefits?

Thanks in advance for any education on this matter. I have always thought that higher is always better but I guess there must be some reasons why that isn't always the case.
I did not read your post entirely because I am in a hurry but I will answer what I have read.

Country's export benefits from weak national currency, but not nominal rate. Real rate of exchange is significant. RER = 1/NEM * I1/ I2

NEM - nominal rate, I1 inflation in given country, I2 inflation in neighbour country

Also it makes income from customs more because when imported goods is revelued in national currency it makes importers to pay larger charges than it payed in the past. Also it decreases import because goods imported are sold in national currency and now this national currency is less than it was in the past.

A lot of issues I can tell you but I am rather in a hurry

thanks
kiss the trend
  • #4
  • May 1, 2006 2:00pm May 1, 2006 2:00pm
I will give you one example.

Indian economy is getting strong everyday, its currency should be valued higher, but the governments dosent allow it to fall below 1USD = INR 42.

The IT Services exporters here get paid in US dollar for their exports abroad. So a 1000 USD payments becomes Rs. 42000 for them. Which is good income.

But if it falls to say like 1 USD = 1 INR one day (hypothetically), than the 1000 USD income payment will be Rs 1000 only, which wont be good income for these exporters.
  • #5
  • Last Post: May 1, 2006 2:28pm May 1, 2006 2:28pm
strong currency can stop inflation (energy prices in USD denomination) but in long-term managed exchange rate cannot be supported long time.

strong currency is good for a country if:

1. Its export is not vital for national economy's strength

2. it wants to stimulate imports especially energy and technics, medicines

3. if government is going to pay external debts (for example if one day Geogia starts paying debts it will benefit if currency is stronger than it was when loan was disburssed)

the worse is high volatility rather than permanent appreciation/depreciation
kiss the trend
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