|
Committee: World Trade Organization Topic A: Currency exchange rate fluctuation
Director: Areli Lilian Barrios Esparza Moderator: Carmina Alicia Villarreal Milchorena
Facts to know The term currency can refer either to a particular currency, for example the US dollar, or to the coins and banknotes of a particular currency, which make the physical aspects of a nation's money supply. In finance and economics, the exchange rate defines how much one currency is worth in terms of another; value of a foreign nations’ currency in terms of the home nations’ currency. The foreign exchange market (banks and other institutions having the capacity to buy and sell currencies) is one of the largest markets in the world, in fact about 3.2 trillion US dollars worth of currency change hands every day. Quotations: An exchange system quotation is giving the number of untis of “quote currency” (payment currency) this is the currency that will be exchanged for ONE UNIT of “base currency” (transaction currency). For example, in a quotation that says the MXNP/USD exchange rate is 13.2827 (13.2827 Mexican pesos per US Dollar) the quote currency is the Mexican Peso and the base currency is the USD. Direct & Indirect quotation: Quotes using a country’s home currency (for example in our case it the peso) as the quote currency are known as direct quotation or price quotation (from that country’s perspective), these are used in most countries. Whereas quotes using a country’s home currency as the base currency are known as indirect quotation or quantity quotation, and again unlike the direct quotation these are used mostly in British newspapers, and are also common in Australia, New Zealand, and the euro zone. -Direct quotation: 1 foreign currency unit = x home currency units -Indirect quotation: 1 home currency unit = x foreign currency units
International Currency Reserves
A reserve currency (or anchor currency) is a currency which is held in significant quantities by many governments and institutions as part of their International Currency Reserves.
These ICR’s are assets (economic resources owned by business or company) of the central bank held in different reserve currencies, mostly the US dollar, and to a lesser extent the euro, the UK pound, and the Japanese yen. The purpose in this is mainly that official international reserve assets allow a central bank to purchase the domestic currency, which is considered a liability for the central bank. This action can stabilize the value of the domestic currency. Central banks throughout the world have sometimes cooperated in buying and selling official international reserves to attempt to influence exchange rates.
Large reserves of foreign currency allow a government to manipulate exchange rates - by selling and buying the foreign currency they influence the demand and thus lowering its value and increasing the value of the local currency… this is usually done to stabilize the foreign exchange rates to provide a more favorable economic environment.
There are costs in maintaining large currency reserves. Fluctuations in exchange markets result in gains and losses in the purchasing power of reserves. Even in the absence of a currency crisis, fluctuations can result in huge losses. For example, China holds huge U.S. dollar-denominated assets, but the U.S. dollar has been weakening on the exchange markets, resulting in a relative loss of wealth.
The controversy… The controversy today is that exchange rates tend to vary often, and therefore many nations are complaining that there are problems in the global currency exchange systems that are unfair. Mostly because of countries such as the United States… having their currency being involved in 86% of foreign exchange transaction, they have to much influence over the global economy based on their domestic policies at home. So the dollar being the major international currency reserve, the world will be affected when there is any sort of unbalance or turbulence in the US economy; like we’re seeing nowadays. Points of view:
China: People have dismissed Beijing's talk of de-emphasizing the U.S. dollar, but China is making moves that could soon lead to a convertible yuan. For the last two months, China's leadership has been complaining about the country's dangerous dependence on the dollar. Beijing holds $2 trillion in dollar assets, accumulated through years of exports to America and massive purchases of Treasuries by the Chinese government. The Chinese began generating attention on the issue in March, when Chinese Premier Wen Jiabao said he was worried that the country's dollar assets could slide. Ten days later Chinese central bank Chief Zhou Xiaochuan suggested replacing the dollar as the international reserve currency. One idea, Zhou said, was to replace the dollar with a basket of currencies supervised by the International Monetary Fund. Venezuela: Venezuelan President Hugo Chavez sought Arab support for his idea of a new oil-backed currency to challenge the U.S. dollar. "A new world is being born. Empires fall. There is a world crisis of capitalism, it's shaking the planet," Chavez told Venezuelan state radio after arriving in Qatar.
Columbia: Turning to the US currency makes banks more dependent and in times of crisis makes them more vulnerable to the international context.
Mexico: It is amazing to know that in September of last year Mexico was doing very well, people started investing their money in Mexico, making the exchange rate quotation MXN/USD as low as 10 pesos. But as the economy began getting worse the investors began removing their money… 6 months later the Mexican peso began losing value reaching a rate of 15-1 US dollars.
Russia: Russia and China are calling for a diversified international currency reserve to diminish the US Dollar's power over international markets. Here are some ranks of countries with their respective foreign currency reserves and gold ( $ in dollar terms): 1) CHINA $ 1,968,000,000,000 2) JAPAN $1,011,000,000,000 3) RUSSIA $ 427,100,000,000 4) TAIWAN $ 296,400,000,000 5) INDIA $ 256,400,000,000
To view the rest of the ranks and search for your country feel free to follow this link: https://www.cia.gov/library/publications/the-world-factbook/rankorder/2188rank.html
-Hyperinflation in Zimbabwe The Zimbabwean Dollar was once worth about 1.59 United States dollars. Since the introduction of land reforms in the early 1990s, hyperinflation and the collapse of the Zimbabwean economy have severely devalued the Zimbabwean Dollar. Critics of President Robert Mugabe blame his land reform policies focused on taking land from white farmers and redistributing it to blacks; they argue that the principal reason that food production has been plummeting is that the new owners lack the knowledge or means to farm productively. In the 21st century the hyperinflation kept increasing reaching a rate of 624% (year 2004) after that the percentage slowly decreased to small three digit numbers.
-Argentine economic crisis The Argentine economic crisis was a financial situation that affected Argentina's economy during the late 1990s and early 2000s. The critical period started with the decrease of GDP in 1999 and ended in 2002 with the return to GDP growth, but the origins of the collapse of Argentina's economy, and their effects on the population, can be found in action before. As of 2005, arguably the crisis was over, though many challenges remain for the country. It started when in 1983, the election of President Raul Alfonsin restored democracy. The new government’s plan was to stabilize the economy and creatining a new currency (the Austral), to do this loans were required. Argentina eventually became unable to pay the debt and its interests. Inflation spiraled out of control, in July 1989, Argentina’s inflation reached 200% that moth alone, topping 5000% for the year. The government encouraged import substitution and accessible credit for businesses, staged an aggressive plan to improve tax collection, and set aside large amounts of money for social welfare, while controlling the spending of money in other fields. There was a huge favorable balance of trade. Argentina has managed to return to growth with surprising strength; the GDP jumped 8.8% in 2003, 9.0% in 2004, 9.2% in 2005, 8.5% in 2006 and 8.7% in 2007.
“The December mistake” 1994 Mexican economic crisis In the presidential elections of 1994, the outgoing president, Miguel Salinas de Gotari had selected Luis Donaldo Colosio as the candidate for the Party of Institutional Revolution (PRI) which had dominates the politics of Mexico for more than 60 years! But he was assassinated so Ernesto Zedillo took his place in August of 1994. Then Jose Francisco Ruiz: Secretary General of the PRI was also assassinated. The world public interpreted Ruiz’s assassination as evidence of the political instability of Mexico and those with funds invested in Mexico began to withdrawn them. Gotari did not want the peso to devalue during his term of office and the devaluation was postponed until it was unavoidable. The attempt to maintain an overvalued peso created economic problems for Mexico this discouraged foreign buyers from buying Mexican products but it encouraged Mexicans to buy foreign products. Furthermore, those with funds held in Mexico could see that devaluation was likely and began converting their peso assets into dollar assets.
1998 Asian financial crisis The Asian Financial Crisis was a period of financial crisis that gripped much of Asia beginning in July 1997, and raised fears of a worldwide economic meltdown. The crisis started in Thailand with the financial collapse of the baht. After exhaustive efforts to support it in the face of a severe financial overextension that was in part real estate driven. At the time, Thailand had acquired a burden of foreign debt that made the country effectively bankrupt even before the collapse of its currency. As the crisis spread, most of Southeast Asia and Japan saw slumping currencies, devalued stock markets and other asset prices, and a rise in private debt. Especially Japan was affected by this crisis, markets collapsed. Questions for the delegate…
*Do you think that some monetary system like the gold standard should be tried again? (The “gold standard” is a monetary system in which a region's common mediums of exchange are paper notes that were convertible into gold. The gold standard is not being currently used by any country, because it was replaced completely by fiat money.)
* Should there be more diversity in international currency reserves instead of just depending on the US Dollar? If you think so, which other currencies would be appropriate to fit this roll? Why?
*Are you in favor of there being one world currency? Why or why not?
*Ways the UN should be involved to maintain equality between nations concerning the currency exchange markets.
For your preparation;
* What is your country's current currency?
*What has influenced in making your currency exchange rate stable or unstable
Bilbliography http://en.wikipedia.org/wiki/1997_Asian_Financial_Crisis https://www.cia.gov/library/publications/the-world-factbook/rankorder/2188rank.html http://www.usatoday.com/news/world/2009-03-31-petro-currency_N.htm http://en.wikipedia.org/wiki/World_currency http://www.bloomberg.com/apps/news?pid=20601087&sid=a5z7pjiZoYpg http://en.wikipedia.org/wiki/Currency http://www.translationdirectory.com/articles/article1801.php http://en.wikipedia.org/wiki/Reserve_currency http://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe http://en.wikipedia.org/wiki/1994_economic_crisis_in_Mexico
|
