A currency exchange rate is one of the many factors to
determine a country's economic standing on an international
level. Inflation, Gross Domestic Product (GDP), monetary policy
and balance of payments affect currencies the most. The Federal
Reserve's monetary stimulus has not only helped the U.S. economy
get back on its feet but has also played a major role in
strengthening the U.S. dollar against major global currencies
such as the Japanese yen, euro and British pound. If one observes
from a macro standpoint, the export and import figures of all
major economies in the world have fallen. Countries have started
introducing monetary stimulus to escape from recession, inviting
deflation, which in turn was affecting their currency. The
economic growth of countries has started slowing as their
manufacturing activities and factory outputs are declining
gradually. Let us consider currencies of major economies versus
the U.S. dollar.
Since the start of 2013, the Japanese yen has fallen almost
18% against the U.S. dollar. Against one U.S. dollar, Japanese
yen increased from 86.16 to 101.22. Of-late, Japan recorded GDP
growth at 0.9%, but export and import data played a major role in
determining the currency exchange rates. For the month of April,
marginal increase in the exports data of 3.9% was offset by huge
imports, which increased 9.4%. Another reason, which is
attributable to the fall of Japanese yen, is the introduction of
the U.S. monetary stimulus. Although this improved the country's
economy, it has affected the country's currency. On one hand,
this policy has increased money circulation for higher
investments. However, it has created problems for itself by
increasing chances of higher deflation. Another factor that has
always affected the currency is the long-term deflation and
continuously increasing of budget deficit. If the country is
unable to control its rising fiscal deficit and deflation soon,
the Japanese yen is set to face more troubles.
Technically, the eurozone crisis started with the meltdown of
Greece about three and a half years ago. The affect trickled down
to major economies such as Germany, France, Italy and Spain.
Eurozone's unemployment level is at a record 17% and the GDP
growth has contracted for the sixth straight quarter. Successive
attempts of anchoring the eurozone out of the crisis have failed.
The European Central Bank has decreased interest rates to record
lows but the measure has hardly affected the economic growth. If
things don't change soon enough for the region, the group will be
on the same path as Japan. Deflation and fiscal deficits will
soon creep in, making things worse for the Euro currency. From
Jul 2011, value of one U.S. dollar in terms of a Euro increased
by 11% from 0.6988 to 0.7757 in May 2013. Rate cuts and external
loans might solve the region's problem temporarily but in the
long run deflation will become a threat, affecting the region's
currency. The region needs a U.S.-like model to accelerate the
The economic recovery in the United Kingdom is relatively
better than the eurozone but concerns linger owing to mixed
numbers. The country's economy has increased marginally and the
unemployment rate has come down from 8.0% to 7.8%. In spite of
the rise in employment, the average earning has been at a record
low at 0.8%. This indicates that consumer spending has not
increased and thus there are chances of these figures adversely
affecting the country's inflation, which in turn will have an
negative effect on the currency against the U.S. dollar. The
irregularity in the numbers remains a cause of concern because
consumer spending drives the country's economy. If consumer
spending continues at the prevailing rate then there is a high
probability that the British pound will show weakness in the
future. Since Jan 2013, the U.S. dollar when compared against a
single British Pound has gained about 6.8% from 0.6183 to 0.6604
in May 2013.
The value of the Exchange-Traded Fund (ETF) of the currencies
in the U.S. stock market has depreciated considerably owing to
the above reasons.
The PowerShares DB US Dollar Index Bullish
) has increased 4.9%, while
CurrencyShares Japanese Yen Trust
CurrencyShares Euro Trust
CurrencyShares British Pound Ster. Trst
) lost 18%, 6.3% and 8.1%, respectively.
The strengthening of the U.S. dollar has been on the back of
monetary stimulus. There are speculations that sooner or later
the quantitative easing will be slowed or ended. Without doubt,
there will be repercussions with the slowing or ending of the
stimulus. The employment numbers, the housing market, and
consumer confidence have attained pre-recessionary levels. The
only glitch that remains is the inflation rate, which is still
hovering around 1% with the unemployment level at around 6.5%.
The question that remains is: Will the U.S. economy and the U.S.
dollar stay strong enough without the monetary stimulus?
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