Question

Pick your favorite currency (not USD) and plot its exchange rate against the USD for the last 20 years. You can obtain historical exchange rate information on Yahoo Finance. It is okay to have a shorter time interval if the currency you picked does not have a 20-year history. Comment on major shifts in the exchange rate given economic and political events in the country of your choice and the United States. Attach the history of the exchange rate.

Answer 1

The currency I have picked up for comparison in INR (Indian Rupee), I have got 14 years history from Yahoo finance from 1st April 2004.

1st Apr 2004 -> 1 USD = 45.61 INR

22nd Apr 2018 -> 1 USD = 66.705 INR

As everyone knows, the main two factors affecting the exchange rates are

-> Interest rates

-> Inflation rates

• The interest rates in India in last 15 years show that it never came below 4.5 %, and remained at 6% on average. On the other hand, in U.S the average fed funds rate has always remained at close to 2%.
• Similarly, the inflation rates in India in last 15 years shows that it has remained at 7% on average. On the other hand, in U.S the average fed funds rate has always remained at close to 2 to 3%

We can note that there is an increase of close to 21 INR in the last 15 years mainly attributable to the difference in interest rate and inflation rate between USA and India.

Apart from the above, many other specific factors influence the movement of difference in the exchange rate between 2 countries. They are:

• Political situations
• Economic conditions
• Trade/Fiscal deficits
• Overall outlook of the country’s growth
• Recession

And so on.

In the graph given above, we can see that when there was great economic depression and U.S real estate crisis, the USD plunged to lower levels of almost 40INR. This is mainly due to a fear looming across the investor community and inflation & interest rate consequently were touching new highs close to 5 to 6% in USA

Also some new tax laws or any other legislations brought in the country, also impacts the exchange rate at least for a short term. For example, India & USA witnessed a change in political scenario in the elections recently which denoted a shift in power. The new governments in India and USA brought in some changes in tax structures like GST implementation in India, Cut in Tax rates in USA. When these are viewed as bigger steps towards economy building, these factors indirectly has impact on the exchange rates.

The political relationship between the two countries also play a vital role in this. Good relationship denotes more exchange of trades and services between the countries.

All political and economic events occuring could be seen as impacting the exchange rate based on how it is viewed and the long term impact of the event.