Comments on: (Economics) If a government wants to increase the value of it’s currency in foreign exchange market, it can? http://www.myylt.com/2009/12/30/economics-if-a-government-wants-to-increase-the-value-of-its-currency-in-foreign-exchange-market-it-can/ Discussion of Forex Trading and Currency Trading Wed, 23 May 2012 14:47:51 +0000 http://wordpress.org/?v=2.3.3 By: Michelle B http://www.myylt.com/2009/12/30/economics-if-a-government-wants-to-increase-the-value-of-its-currency-in-foreign-exchange-market-it-can/#comment-21289 Michelle B Tue, 30 Nov 1999 00:00:00 +0000 http://www.myylt.com/2009/12/30/economics-if-a-government-wants-to-increase-the-value-of-its-currency-in-foreign-exchange-market-it-can/#comment-21289 It will appreciate its currency. The increase in interest rate is one of the measure to induce hot money to come in. It will appreciate its currency. The increase in interest rate is one of the measure to induce hot money to come in.

]]> By: Nick http://www.myylt.com/2009/12/30/economics-if-a-government-wants-to-increase-the-value-of-its-currency-in-foreign-exchange-market-it-can/#comment-21290 Nick Tue, 30 Nov 1999 00:00:00 +0000 http://www.myylt.com/2009/12/30/economics-if-a-government-wants-to-increase-the-value-of-its-currency-in-foreign-exchange-market-it-can/#comment-21290 Exchange rates are tricky because, since everything is relative, it's really easy to mix up your terms and talk about inflows and exports when you should have been talking about outflows and imports. To keep things simple, everything I say is going to be from the US standpoint. Think about why foreign citizens would demand dollars. The biggest reasons--and likely the only ones relevant for a class--are foreign consumers wanting to buy our stuff (exports), and foreign investors buying our capital (capital inflows). They can't do this in euros or pounds because nobody in America will accept them, so they have to get dollars first; this supply/demand dynamic is what drives fluctuations in the relative values of different currencies. Now then, to increase the value of a currency--for simplicity, say the dollar--a country would want to make it's prices low to attract foreign consumers, and it's interest rates high to attract investors (remember, the interest rate is the rate of return they'll be getting on their investments, so to them, the higher the better). Exchange rates are tricky because, since everything is relative, it’s really easy to mix up your terms and talk about inflows and exports when you should have been talking about outflows and imports. To keep things simple, everything I say is going to be from the US standpoint.

Think about why foreign citizens would demand dollars. The biggest reasons–and likely the only ones relevant for a class–are foreign consumers wanting to buy our stuff (exports), and foreign investors buying our capital (capital inflows). They can’t do this in euros or pounds because nobody in America will accept them, so they have to get dollars first; this supply/demand dynamic is what drives fluctuations in the relative values of different currencies.

Now then, to increase the value of a currency–for simplicity, say the dollar–a country would want to make it’s prices low to attract foreign consumers, and it’s interest rates high to attract investors (remember, the interest rate is the rate of return they’ll be getting on their investments, so to them, the higher the better).

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