Economics Report

Submitted to: Sir Irfan Lal Submitted by: Sunny (16146) Section: A Program: BS (joint honors)

US CURRENCY VALUATION AGAINST OTHER CURRENCIES.

Table of Contents.
Introduction Why the US currency is appreciating against other currencies? Reasons of appreciations. Why other currencies are continually depreciating against the US Dollar like Japanese Yen, Pakistani Rupee and other currencies? Reasons How US businesses are benefiting from the appreciation of the US currency? Overall effects on the balance of payment of US. How other currencies can manage their currencies to compete in international trade? Total effect of US currency valuation on the world businesses.

Introduction Currencies are important for the economies of the world. One of the most important currencies is the US Dollar (USD) which belongs to the United States of America. We always listen in news and on the internet that US currency has appreciated against Yen or Indian rupee down 30 paisa at 62.13 against US dollar. These all types of news leads us to think for a moment about what is so important about this news. The important about US currency is this that it is the leading currency of the world and when we are involved in international trade mostly US dollar is used to make transactions. And other countries compare their currencys value with the USD to know the value of their currency. In this report, I am going to elaborate the US currencys valuation against other currencies and how other economies of the world are being affected by the appreciation of US Dollar. Following are the objectives of my report which you can evaluate after reading this report. US currency position in the world. How world businesses are operating keeping in mind the US Dollar rate. What edge do American enterprises and businesses have when the US Dollar appreciates? How other currencies of the world are responding to the strong US Dollar position Why is it important for the America to maintain its currencys strong position in international market? Why other countries do not have strong currencies? The operations of overall economies of the world keeping in mind US Dollar rate. Conclusion.

Why the US currency is appreciating against other currencies? Reasons of appreciations.

Whenever a currency appreciates there are certain reasons that make it appreciate. In the same way US Dollar is also appreciating against other currencies due to different reasons. These reasons include like demand for the US Dollar which can happen due to several reasons like the US goods are sold overseas and an inflow of currency happens in US which needs to be converted to US Dollar. The demand for the US Dollar can also strengthen due to inflow of foreign investment which would cause the US Dollar to appreciate. In fact, last month president of USA Barack Obama told global business leaders to invest in USA as was reported on USATODAY.COM which is a national American daily newspaper published by the Gannett Company. This shows that USA is determined to invite foreign investors into their country. Many different countries purchase USD to make a profit which further increase the demand for the USD and thus its value increases in international Exchange market. A most recent example of this thing is the buying of USD by big Pakistani business tycoons to increase the value of their money by converting local currency into USD as was reported by leading print media like Dawn and Express newspapers. The US

Dollar is appreciating supported by expectations that the Federal Reserve will slow down monetary stimulus later this year, as it was reported on MARKETWATCH.COM website, which operates a financial information website that provides business news, analysis, and stock market data. Thus it is clear that in the exchange rate market speculation plays an important role to appreciate or depreciate a currency. When a countrys economy is growing it experiences growth and eventually currency appreciates. John Doyle, director of markets at Tempus Inc. said that The dollar has more room to gain against the euro because of the diverging growth stories in the two economies, which clearly explains that the US economy is growing which is leading towards its currency appreciation. The growth of the US economy is also evident from the decreasing unemployment which is leading to greater growth rate in the US economy. The recent posting by MARKETWATCH.COM reported that The ICE dollar index (+0.04%), which measures the U.S. unit against six other major currencies, rose to 82.964 from 82.553 late Tuesday in North America. The ICE dollar index posted its sixth straight session of gains, according to FactSet data The Standard & Poor's CaseShiller Home Price Indices are repeat-sales house price indices for the United States. There are multiple CaseShiller home price indices: A national home price index, a 20city composite index, a 10-city composite index, and twenty individual metro area indices. Saumya Vaishampayan, a MarketWatch reporter said that The dollar on Tuesday advanced against major rivals after an S&P/Case-Shiller report that U.S. home prices rose 2.5% in April, the biggest monthly increase on record. Thus some biggest Economic think tanks are of the view that increasing house prices will eventually result in the US Dollar appreciation which further enforces the economic growth of the country. Furthermore, investors are going to keep a close watch on Treasury yields, as their rise lifts the dollars investment appeal. Therefore, house prices are playing an important role to appreciate the US Dollar against other currencies. Interest rate of an economy is crucial to the exchange rate of any currency. Interest rate of any country is decided by its central bank. The central bank of USA is Federal Reserve Bank. Currently the Federal Reserve Bank has adopted an interest rate of 0% to 2.5% according to report by GLOBAL-RATES.COM, the source for international interest rates and economic indicators. As compared to some big economies like China, Japan and Brazil the US interest rates are high relative to elsewhere which is attracting inflow of money into USA is seeking to take advantage of the high interest rates. Thus this interest differential is going to boost the demand for the US Dollar which will cause the appreciation of US Dollar. However other economies like China are also trying to increase the interest rate to compete with the US Dollar but there are number of factors which are considered before any currency appreciates. The recent report by MarketWatch.com has reported that the Federal Reserve Bank of America has slowed down the process of buying foreign currencies which keeps the supply of US Dollar constant in the market and it continue to appreciate. The central bank has also slowed down the bond buying which is constantly keeping the US Dollar in its position against the US Dollar. Thus overall the supply of USD is limited to maintain its value in the international exchange market.

Since as reported earlier in this report that the US economy is growing at a faster pace, so it means that local businesses are doing well enough to outweigh the outflow of money with the inflow of money. Furthermore, when the currency outflows the supply of a currency increases and it depreciates. But, since economy is growing and there are not much outflows as compared to inflows the supply of US Dollar is constant to keep it at an appreciating rate. As the speculation in the exchange rate market works for the demand of money it also works for the supply of money. Since speculation is high that US Dollar will work well against other currencies, the US currency will appreciate. This is because the demand for the US Dollar will exceed supply and thus it will appreciate in the exchange rate market. Wallace Witkoski, a MarketWatch news editor told that The dollar held above 103 Japanese yen on Monday after U.S. jobs data and Federal Reserve presidents suggested the Fed my scale back its bond buying program as early as next week. Therefore, speculation is playing a vital role to give an edge to the US currency against other currencies. The US in 2010 and 2011 was the largest importer of Chinese products. This really caused the US Dollar to depreciate as money was out flowed. But at the start of 2012 USA has put some legal issues like the child labor abuse by the Chinese enterprises to make cheaper products. Thus the Congress moved a resolution to put some tariff on the Chinese products. Thus, the import of Chinese product into USA has slowed down which has resulted in people using local products. The less use of imported products means that less outflow of money and therefore the currency appreciates. Therefore, the US Dollar has again got the strength by appreciating. Therefore, it is evident that the US Dollar has got much strength against other currencies due its demand and supply adjustment of its currency. Much of the analysis by experts on Economics issues also reveals that the US Dollar is constantly appreciating and is gaining growth due to large investment on the part of business leaders and individuals. This appreciation would really give an edge to the USA to increase its business influence around the world to become the strongest economy of the world.

Why other currencies are continually depreciating against the US Dollar like Japanese Yen, Pakistani Rupee and other currencies? Reasons
As the currency of an economy appreciates it can also depreciate. We always listen in news that Japanese yen is depreciating against the USD. The Wall Street Journal reported just 11 hours ago that The dollar hit its highest level against the Yen in more than five years, as investors bet that a recent spate of positive U.S. data would pave the way for the U.S. Federal Reserve to start trimming its bond-buying program as early as this month. Thus it is clear that yen is depreciating against the US Dollar and it depreciated at the highest level in five years. This is because Economists expect that the Yen will further go down in value as speculations are high about the US Dollar appreciating in the coming month.

Dr Sampson O. Amoafo, an economic consultant and former Assistant Professor of Finance

and Economics at Alabama State University told that the Ghana Cedi is continuously depreciating against the USD which is partly from the Central Banks policy to depreciate the currency to make imports expensive and exports cheaper so that the balance of

payment could balance. Thus, the Central Banks policy can also influence the exchange rate of a country. The following table below shows the trend of exchange rate between Japanese yen and US Dollar.

It is clear from the above diagram that the Yen has been continuously depreciating against the US Dollar which started at the end of the 2007 and has continued to depreciate till this date. The depreciation is largely due to investors speculation about the Dollar increasing against the Yen and more supply of Yen than its demand. It is important to know that the Central Banks intervention into the exchange rate is limited as it can run out of reserves. If a countrys interest rate is higher as compared to the other countries, its currency will depreciate. We have also seen in the last six months that the interest rate of Japan is high to that of US, which will eventually result in Yen depreciating against USD. A reporter of Reuters reported that The dollar rose for a second straight session against the euro on Friday, as investors began pricing in the possibility that the U.S. Federal Reserve could announce a small reduction in its massive stimulus at next week's meeting. This is because the market participants expect that the bond buying by the Federal Reserve Bank would increase which would appreciate the US Dollar against other currencies. As we are discussing the depreciation of the currency, the Australian Dollar has also declined to 1.6% against the USD. Saumya Vaishampayan, a MarketWatch analyst has reported that The Australian dollar slumped 1.6% against the U.S. dollar this week, weighed on by remarks from its top central banker and expectations about U.S. monetary policy. This is largely happening due to the speculation about the US currency appreciating against the Australian Dollar. The Australian Dollar also depreciated after the

Reserve Bank of Australias president Glenn Stevens said that he prefer a weak Australian Dollar against USD. Dawn, a leading print media and daily English newspaper has reported that foreign debt has increased due to the Pakistani rupee continuously falling. Pakistani rupee is continuously depreciating in value which is due to low economic growth and more printing of currency notes than required. Thus, it increases the supply of money and money loses its value in the international market. Livemint, an Indian financial news website has also reported that the Indian rupee has declined consecutively for the last three weeks which is due to increasing inflation rate, low factory output and a concern that the US Federal Reserve will begin tapering stimulus as early as next week. Following diagram shows the last six months trend between Indian rupee and US currency.

Thus, it is clear that market speculations, inflation rate, interest rate, and economic growth play a vital role in the depreciation of a currency as is seen in the cases of South Asian currencies like Japanese Yen, Pakistani Rupee and Indian rupee. These all above factors can be found in these economies which are depreciating their currencies in the international exchange market. Obviously, these factors cannot be found in the US economy which is helping it to be the leader in the exchange market and it is benefiting at a larger extent from its appreciating exchange rate.

How US businesses are benefiting from the appreciation of the US currency?

As discussed earlier that US currency has continuously appreciated against other currencies. When a countrys currency appreciates its local businesses benefit from it. In fact, local businesses in the US can import any product at cheaper rate due to their strong currency rate. This is evident from the fact that the USA is the single largest importer of Chinese products despite the legal issues of child abuse. Due to strengthening economy of the US other countries can also benefit. Recent report published on CTV news by RBC Economics said that after another year of mediocre growth, Canada's economy is expected to perk up in 2014 thanks to strong growth in the United States.

Another news website PhilStar.com reported that The Bangko Sentral ng Pilipinas (BSP) said
yesterday the recently passed US budget deal could benefit the Philippines due to reduced volatilities in global financial markets. The developments related to the US budget deal should ease some of the pressure off global markets, BSP Governor Amando M. Tetangco Jr. said in a text message Therefore, it is clear that other economies are also benefiting from increasing appreciation in the US currency. The currency appreciation of the US Dollar has also resulted in employment for the Americans and the world around. This is evident from the fact that Ford, an American automobile company will be hiring 11000 workers in 2014 in America and Asia as this company has branches all around the world. The BBC News reported about ford as Ford has announced plans to hire 11,000 workers in the US and Asia in 2014 as part of a global expansion plan, which is clear signal of US currency benefiting its enterprises. The below table shows the strong economic growth that the US businesses has got due to strong Dollar.

Therefore, it is evident that businesses all around USA are benefiting from strong currency by creating jobs, importing products at lower cost and overall improving the surrounding economies of the world.

Overall effects on the balance of payment of US.

Since the US Dollar has appreciated to a greater extent in the international market, it will have significant effects on the Balance of payments of USA. Balance of Payments is the balance between the imports and exports of a country. If the imports are higher than exports the countrys currency depreciates and if the exports are higher than imports then the currency appreciates. Obviously the US Dollar has been appreciating since last year so we expect the Balance of payment of US to be in positive. According to Bureau of Economic Analysis, source of US economic statistics including national income and product accounts, the balance of payment of US has significantly improved in the last two years time. Mostly the balance of payment of USA contains current accounts of Merchandise Trade, Military Transactions, Travel, Passenger fares, Transportation, Royalties and License fees, other private services, and U.S. Government Miscellaneous services. These all add up to make the current account of the balance of payment. The overall effect on balance of payment has been positive because income on direct investment has significantly increased. Following table shows the income on Foreign Direct Investment. Table II-26.Receipts of Income on U.S. Direct Investment Abroad, 2013 (Line 12) [Millions of dollars; credits +, debits ] Total ................................................................................................................. 48,264 Earnings ...................................................................................................................... 49,860 Of which: Capital gains/losses (gains +; losses ) ............................................................. 144 Distributed earnings ................................................................................................ 34,690 Reinvested earnings ............................................................................................... 15,170 Interest (net of withholding taxes) on intercompany accounts .................................. 1,596 U.S. parents receipts ............................................................................................. 2,052 U.S. parents payments ........................................................................................... 3,648 Memorandum: Withholding taxes on distributed earnings .............................................................. 2,475

The above table clearly shows that the income from Foreign Direct Investment has significantly improved to benefit the balance of payment. Thus it is to benefit the local businesses to make more profit and foreign investors would be interested to invest in the US because of its good position in the balance of

payment. This is largely due to good Dollar rate which will reinforce the confidence into the economy to further increase the Dollar rate against other currencies.

Now we will consider another part of the balance of payment-Capital Account. The Capital Account is an important part of the balance of payment which includes U.S. official reserve assets, allocations of special drawings rights, U.S. government assets other than official reserve assets, direct investment, and transactions in securities other than U.S security treasuries. Both capital account and current account are in strong position due to good appreciation rate of US Dollar. Foreign direct investment and direct investment would increase as foreigners will make greater profit from investing into the US businesses. This is largely due to good Dollar rate that gives good incentive to those who are investing into the USA. Following table shows the foreign direct investment in USA. Table III-6.Foreign Direct Investment in the United States, Capital, 2013 (Line 59) [Millions of dollars; credits +, debits ] Total ................................................................................................................. 58,435 Equity capital ........................................................................................................... 40,362 Increases in equity capital ................................................................................... 43,644 Decreases in equity capital ................................................................................. 3,282 Reinvested earnings ............................................................................................... 6,560 Intercompany debt .................................................................................................. 11,513 U.S. affiliates payables ....................................................................................... 17,747 U.S. affiliates receivables ................................................................................... 6,234 By industry of affiliate: Equity capital ........................................................................................................... 40,362 Petroleum ............................................................................................................ 866 Manufacturing ...................................................................................................... 17,573 Other .................................................................................................................... 21,923 Reinvested earnings ............................................................................................... 6,560 Petroleum ............................................................................................................ 696

Manufacturing ...................................................................................................... 4,030 Other .................................................................................................................... 1,834 Intercompany debt .................................................................................................. 11,513 Petroleum ............................................................................................................ 2,426 Manufacturing ...................................................................................................... 6,629 Other .................................................................................................................... 7,310

Thus it is clear from the foreign direct investment table that due to good currency rate the investment into the USA has significantly increased resulting in greater prospects for the US economy in the coming years.

How other countries can manage their currencies to compete in international trade? The US currency has significantly given tough times to the emerging economies as it is very difficult for them to survive them into the international market if their currencies are constantly depreciating. The constant depreciation would result in staggering foreign debt and more borrowing from international organizations like IMF and eventually the whole economy goes down. However, there are some important steps that can be taken to control the depreciating currency. The first thing to do is to control the supply of money into the market so that the money does not depreciate. This supply can be controlled by NOT printing money, because if more and more money is printed it will lose its value and will eventually depreciate. Furthermore, to control the depreciating currency there will be need to curb the speculation about the currency. The speculation about the currency can be curbed by Central Bank of a country adjusting an interest rate to attract foreign investment. This would increase the confidence into the economy and eventually the bad speculation would turn into good news for the economy. The times of India, an Indian online website for Indian financial and political news reported that the Finance Minister of India said that "A number of steps have been taken to moderate demand of non-essential imports on April 12, 2013, enhance capital flows to augment supply of foreign exchange and curb speculation in the foreign exchange market to stem the rupee depreciation," Chidambaram said in a written reply to Lok Sabha on Tuesday.
Thus it is evident that it is important for every currency to maintain an adjusted exchange rate so that they could compete in the international market. According to a research paper published by the RePec (Research Papers in Economics) devaluation of currency is not good for the economy at all and the speculation of the people further increases which leads to an indefinite period of instability and inflation in the country. Luis-Felipe Zanna, a researcher writes on the http://www.federalreserve.gov that:

We find that, if a government raises the interest rate proportionally more than an increase in currency depreciation, then it induces selffulfilling cycles that, driven by peoples expectations about depreciation, replicate several of the salient stylized facts of the Sudden Stop phenomenon. These facts include a decline in domestic production and aggregate demand, a collapse in asset prices, a sharp correction in the price of traded goods relative to non-traded goods, an improvement in the current account deficit, a moderately higher CPI-inflation, more rapid currency depreciation, and higher nominal interest rates. In this sense, an interest rate policy that responds to depreciation may have contributed to generating the dynamic cycles experienced by some economies in the aftermath of a currency crisis. Thus it is clear indication that interest rate and inflation rate need to be controlled in order to save a currency from depreciating. Otherwise, there will be serious effects of the currency depreciation on the economy of a country. Following table shows a comparison between the exchange rate of countries.

The above table shows the exchange rate analysis between South Asian countries. It is important to compare a countrys exchange rate with other currencies in order to know the value of our own currency.

Total effect of US currency valuation on the world businesses. As the US currency has constantly appreciated against leading economies of the world, there are some serious effects on the businesses around the world. Although most businesses rely on their countrys exchange rate, there are indirect effects of US currency appreciation on world businesses. According to a BBC report the declining Indian rupee against US Dollar has serious effect on the Indian economy. Several sectors are being badly affected, prime among these, are
petroleum companies and automotive manufacturers who rely heavily on imports. The falling rupee could widen India's current account deficit, which has already been a big concern for the country. Already lot of importers have stopped importing as they speculate that Dollar will be high against the Indian rupee which could cause the imports to be more expensive for the country. The local currency in the Phillipine is also losing its value as its Phillipine Peso is depreciating against the dollar. This is causing panic amongst service sector as people are losing jobs and the purchasing power parity of Peso is not much strong to cover the expenses of an individual daily wager. This may also cause political instability in the country. China is one exception in the international market which maintains its standard in the exchange rate market by keeping its exchange rate compatible with the US Dollar. This really does not cause much problem for the Chinese economy as they cleverly organize their economic data and control speculations about Chinese Yuan. South Korea which mostly relies on the exports has a worrying aspect as the Japanese Yen is continuously losing its value against the US Dollar. The decrease in the value of Japanese Yen means that South Koreans goods are expensive to Japan and this would result in less exports from South Korea to Japan. This would create unemployment in South Korea as goods are not much demanded and thus would result in some policy to be implemented to control the export of goods. The Australian Dollar is also suffering as its importers cannot import much due to expensive imports which is mainly due to depreciation of Australian Dollar against US Dollar. Therefore, businesses of all types are affected by the exchange rate between their local currency and the US Dollar. However, in recent months there have been many pressures on the Aussie dollar; from the strength of the US and Chinese economies, to interest rates and the softening of the mining boom. And that has provided some much-needed relief for those weighed down by a muscular currency. The mighty "Aussie" has lost more than 10% of its value since mid-April. The South American currencies are also much dependent on the exchange rate with the US Dollar. The Brazilian real is also weaker against USD which will effect businesses in Brazil. The most serious effect will be on fuel prices in Brazil and fuel prices would go up. A weak real will increase the burden of Oil Marketing Companies (OMCs) and this will surely be passed on to the consumers as the companies are allowed to do so following deregulation of petrol and partial deregulation of diesel. If the OMCs increase fuel prices, there will be a substantial increase in overall cost of transportation which will stoke up inflation. Therefore, the US Dollar rate plays a vital role in shaping the world businesses. Businesses all around are in some way affected by the fluctuating dollar rate.

Conclusion/Recommendations
In this report, the US currencys tremendous valuation against other currencies has been discussed. It provides a detailed analysis of why the US Dollar has been so strong against other currencies, and how other countrys currencies are being affected by the US currency. Furthermore, I also discussed the remedies to counter the depreciation of different countries and how businesses around the globe are being affected by the US appreciation of currency. After I have provided the conclusion about this report, I would like to give some recommendations about the US currencys valuation against other currencies. My recommendation is that the US Dollar has appreciated much which needs to be controlled by the concerned authorities otherwise more and more appreciation will cause the export sector of USA to go down as exports would become expensive for the other countries. This would create unemployment in the USA which may lead to slower economic growth. The tourism sector of USA would also suffer as it would become expensive for foreigners visiting USA. This again would create unemployment in the USA. Therefore, its important for USA to control its exchange rate with other countries so that the international trade could benefit both USA and the remaining world. Another recommendation for those countries whose currencies are continuously depreciating is to implement an adjusted inflation rate and interest rate that could adjust the exchange rate in favorable position against other currencies. To implement these policies, there need to be good economists who could forecast the future of the economy in the right direction. My overall analysis of currency markets leads me to the point that exchange rate of any country is important to its survival in international market. With strong exchange rate, a country could improve its economy to a greater extent.

Bibliography These are the resources that are used to compile the report. 1. WWW.MARKETWATCH.COM 2. ONLINE.WSJ.COM 3. WWW.DAWN.COM 4. WWW.INDIANTIMES.COM 5. WWW.PHILSTAR.COM 6. WWW.BBC.CO.UK 7. WWW.IOSJOURNALS.ORG 8. WWW.BEA.GOV 9. WWW.FEDERALRESERVE.ORG 10. WWW.ZEENEWS.INDIA.COM