So what are the major factors that influence exchange rates?

Differentials in Inflation. A country with a consistently lower inflation rate generally exhibits a rising currency value. This means that a country’s purchasing power increases relative to other currencies. (Take note that exchange rates are relative and are expressed in comparison to the currencies of other countries.)

Differentials in Interest Rates. Interest rates, inflation, and exchange rates are closely linked together. When central banks manipulate interest rates, both inflation and exchange rates are also influenced. Higher interest rates allow lenders to gain higher returns. Notably, higher interest rates also attract foreign capital that causes exchange rates to rise.

Current-Account Deficits. The ‘current account’ reflects all trade payments between countries for goods, services, interest, and dividends. So, a deficit in the current account means that a country is spending more on foreign trade than what it’s earning. In other words, the excess demand for foreign currency pulls down a country’s exchange rate until domestic goods and services are cheap enough for foreigners and foreign assets are too expensive to generate domestic returns. The difference between a country’s imports and exports is unhealthy; the balance of trade is disrupted.

Public Debt. There are instances when a country needs to borrow money to pay for public sector projects and, also, for their own government’s funding. While such move stimulates the domestic economy, a large debt encourages inflation. This leads back to the discussion on the differentials in inflation. High inflation = low currency = low purchasing power.

Terms of Trade. ‘Terms of trade’ refers to the ratio comparing export and import prices. An increasing terms of trade means a greater demand for the countries exports. This translates to high revenues from exports and an increased demand for the country’s currency.

Political Stability and Economic Performance. A stable country is more likely to exhibit a strong economic performance. Stable countries are also the same countries that attract foreign investments. So as more investments come in, a country’s capital rises. In effect, this ensures a more stable currency.

Why bother to know these things? Because exchange rates matter on a smaller scale as well, i.e. they impact the real return on an investor’s portfolio; because exchange rates also affect you’re spending, as well the prices of your country’s goods and services, and even employment rates.

Source: Investopedia

Analysts have been saying that a recovery has been very likely given indicators such as the stock market’s rally and the rebound of certain markets. The only factor that prevented an optimistic claim was the still- widespread unemployment. However, after the latest jobs data proved to be better than expected, analysts are starting to jump into the optimists’ bandwagon.

Consumer spending has also risen in June for the second consecutive month while productivity jumped in the second quarter showing that workers are willing to produce more for less pay. Exports are also up by 2% to signify that manufacturing is also on the rise.

“It is not all that surprising, it acknowledges a lot of what we have been seeing, that conditions are stabilising and the recession may be ending,” said Mark Vitner, an economist at Wells Fargo.

Source: BBC

Well, it doesn’t take a fancy and influential position to say that. History book should serve as a constant reminder of what can happen when people lose their jobs and homes and become broke and hungry.

Zoellick highlights the current situation in Eastern Europe where the region’s economies are shrinking fast. He suggests that governments should be ready to handle sudden rises in unemployment rates.

“In my opinion, in this context, nobody really knows what is going to happen and the best one can do is be ready for any eventuality,” Zoellick told Spain’s El Pais newspaper. “There is also what I call the ‘X-factor’, that one can not foresee,” pertaining to the swine flu spread.

The World Bank has previously warned of a “human catastrophe” in the world’s poorest countries unless more is done to tackle the global economic crisis.

The organization pegged that 53 million more people are at a risk of extreme poverty.

Source: BBC

Here are some key points from the story:

• Loans are still increasing but credit squeeze maybe over. Borrowing rates are down. Credit rates are improving. These provide cushion for businesses not to go under. Cash flow makes it attractive for investors to put cash into the markets.
• The pace of economic decline has slowed down. Exports are down but pace is moderating. GDP is declining at a more moderate pace.
• While these can be seen as positive indicators, the fact is these are all in decline.
• Areas to consider: unemployment, existing private sector debt, and government’s recovery of the bailout funds.
• Mishandling of situation can lead to another economic failure.

Economists have already expressed similar projections of an early recovery. The IMF chief, however, emphasizes the role of cooperation such as the adoption of policies to spur a recovery worldwide. Lack of aid for low-income countries threaten “to cast millions back into poverty; the human consequences here could be absolutely devastating.”

Strauss-Kahn said at last month’s G-20 summit in London that presidents and prime ministers from rich countries and emerging market nations focused on urgent actions needed to restore growth and on what must be done to repair some of the underlying problems that caused the world crisis.

Given past recessions, recovery is often sluggish due to weak demands. While a number of economists consider the strong gains of the US market in the past month as a strong sign of a possible early recovery, weak profit reports show that the economy still has to do much better.

Source: MSNBC