Question

An arbitrageur is a person who exploits the differences in the price of a given security by simultaneously purchasing and selling that security.

Under what circumstances do you think that the activities of these currency speculators can lead to destabilizing exchange rates among major currencies?

Answer 1

THE CIRCUMSTANCES UNDER WHICH THE ACTIVITIES OF THESE CURRENCY SPECULATOR CAN LEAD TO DESTABILIZING EXCHANGE RATE AMONG MAJOR CURRENCIES ARE :--

1- INCREASE IN THE RATE OF INFLATION -- When there is rise in the price of the goods and services in the economy and the flow of the money in the market is more that's the situation of inflation in the economy . due to the rise in the inflation rate in the economy the purchasing power of the customer will decrease which will lead to the decrease in the value of the currency of the country . This will lead to the destabilizing the exchange rate in the international market . Where as the low inflation rate leads to rise in the value of its currency .

2- CHANGES IN THE BANK BASE RATE -- Interest rate is the amount paid by the borrower on the privilege of getting the loans . The rise in the interest rate leads to the upward lift of the currency of the country . A bit change in the base rate of interest in the country leads to the change in the interest rate in the other economy too . Due to this foreign capitals are likely to get attracted due to getting more interest on providing loans , and due to increase in the demand leads to the rise in the value to the currency .

3- THE BALANCE OF PAYMENTS -- The balance of payment is the record of the exchange of the goods and services of one particular country with rest of the world . The figures comes out of the balance of payment shows the demand and the supply of the commodities and the services and cause to the changes in the exchange rate . When the import of goods and services is more than the exports of them that means there is the occurrence of deficit , which may lead to the low down of the value of the currency .

4- INCREASE IN THE GOVERNMENT DEBT -- To overcome the expenditure incurred in the country the government borrows money that is called government debt . Its basically done my issuing bonds and other securities . If the investor to that country are suspecting a high rate of government borrowings which is getting unmanageable for the government , then they have to sale there assets in the open market to overcome the debt amount . Due to this the value of the countries currency will get reduced and there will be destabilization in the exchange rate in the economy .