Question

1. International Finance (10)

1. Assume that the current exchange rate is $40 =£ What value for the exchange rate (provide a specific number – change the $ value but leave the£value at 1) would mean a stronger dollar? What value would mean a weaker dollar?
2. Who gains and who loses from a weak or a strong dollar and why?  Is it better for a country to have a weak or a strong dollar?

Answer 1

Given, $40= £

If exchange rate changes to $39= £, it would imply a stronger dollar and a weaker British Pound.Any value less than 40 would imply a stronger U.S.dollar.

However, if exchange rate changes to $41= £, it would imply a weaker dollar and a stronger British Pound. Any value greater than 40 would imply a weaker dollar.

A weaker dollar would lead to gains to U.S. exporters as instead of $40, they would get $41 for every British Pound received as payment. However, U.S. importers would suffer loss as they have to pay a dollar extra for every British Pound paid for the imports.

A stronger dollar would lead to gains to U.S. importers as they have to pay a dollar less for every British Pound paid for their imports. However, U.S. exporters would suffer loss of a dollar for every British Pound received for their exports.

A strong currency is not always better and a weak currency is not always worse. It depends upon the type of economy. If the country is export-oriented, then a weaker currency would be beneficial. However, if a country is import-oriented, then a stronger domestic currency would be beneficial,