Free Essay About The Link Between Foreign Exchange Markets

and the Money Markets Between Two Countries

Introduction

Barry W. Ickes states that if there were the sole currency in the world, foreign exchange markets would not exist (1).
Since the ancient times people and countries are known to have dealt with the matters of exchanging their national (domestic) currency (tender) for the foreign one. What forced them to buy foreign notes? Practically, every country in the world tends to produce certain goods or services some portion of which is exported to the other country (trading partner) due to the demand for these products in the other country. Nowadays this phenomenon is called an “international trade”.
Although, the author demonstrated international trade as a primary accelerator of the foreign exchange markets, it should not be considered as the sole one. Tourism, investors’ desires not to lose the value of their assets owing to the political or economic turbulences, or a decline in manufacturing field – all these factors contribute to the existence of the link between foreign exchange markets and national money markets of countries across the world.

The United States and the European Union:

Interdependence of Currencies
In 2003 The Economist wrote about the dramatic collapse of dollar since 1980s. The point of the story is that the dollar has been drastically falling against the euro: in 2001 the euro was worth only a bit more than 80 cents, while in 2003 the situation radically deteriorated and not for the benefit of the United States, because the euro got increased in its value and was already worth $1,20. The authors of the articles were seriously concerned with this event for the United States’ economy had been showing the increase in GDP and that was not attributable to the economies of the European Union member states which demonstrated very slight increases (The Economist).
In fact, the articles in furtherance solved the puzzle: the root of the aforementioned unpleasant event for the United States was found in the high demand for imported goods and services on the part of American consumers. The United States proved to have imported too much and this factor was not rebutted by the obvious increase in GDP and the economic growth in general. Hence, by importing large amounts of goods and products, America got the account deficit and that provoked the depreciation of the national currency.
The European manufacturers should have been happy of receiving the chance to earn more by importing the goods for higher prices since the euro strengthened. Surprisingly, the European authorities and private sector were nervous of the dollar depreciation, because it meant the relatively expensive import for the American consumers. At the same time, American manufacturers could be benefited by the dollar falling: they gained the opportunity to export goods and services for the lowered prices. The purchasing power of the European consumers increased and they could buy more for the same amount of money.
Currently, the foreign currency exchange rate illustrates that the euro is even cheaper than the dollar: one euro is worth $0,9975 (Bank of America).

What Impacts the Exchange Rates?

Actually, the foreign exchange rates are influenced by many factors which are sometimes unpredictable due to the contemporary implications of foreign relations and the global economic ties established among the countries across the world. However, the specialists identify several factors including:
1) political instability within the countries or regions which forces the investors to keep their assets in more safe legal tenders. Historically, the American dollar has got the recognition as one of the most popular legal tenders to retain the assets in. Over more than a decade, this recognition is also shared by the euro;
2) external events have the potential to contribute to the oversold or overbought market whereby the foreign currency exchange market needs to be recharged to start a new cycle of functioning;
3) the change in economic indicators can also provoke turnovers: inflation, unemployment, migration, recessions, trade balances, GDP changes (Das, 25 – 26).
In any way, the contemporary picture of the world economy is so multifaceted that it is impossible to specify all the variety of factors being able to impact foreign exchange markets and currency exchange rates.

Conclusion

The linkage between foreign exchange markets and the money markets between two countries has been demonstrated on the example of the United States and the European Union whereby the domestic demand for imported goods in America caused the depreciation of the American dollar against the euro. Conversely, the dollar depreciation lessened the demand for the import due to its expensiveness and the markets eventually got balanced.

Works Cited

Bank of America. "Foreign Exchange Rates For U.S. Dollars." Web. 14 Apr. 2015. <https://www.bankofamerica.com/foreign-exchange/exchange-rates.go>.
Das, Tanmoy. "Globalization and Foreign Exchange Market." Web. 14 Apr. 2015. <http://www.academia.edu/1807796/globalizatin_and_Foreign_exchange_market>.
Ickes, Barry W. "The Foreign Exchange Market." 1 Sept. 2006. Web. 14 Apr. 2015. <http://grizzly.la.psu.edu/~bickes/forex.pdf>.
The Economist. "A Faded Green." 4 Dec. 2003. Web. 14 Apr. 2015. <http://www.economist.com/node/2269166>.
The Economist. "The Not-so-mighty Dollar." 4 Dec. 2003. Web. 14 Apr. 2015. <http://www.economist.com/node/2266274>.