Posted by Tony on Friday, February 1, 2008 at 11:32am.
One important point to keep in mind: value of a currency is simply the price of that currency stated in terms of a different currency. For example, the value of a Euro is the number of Dollars it takes to purchase a Euro. And, equilibrium is determined by the intersection of supply and demand. In this case, the supply and demand of Euros.
Second question first.
There is not DIRECT relationship between the value of a currency and debt, deficit, and GNP. That is, changing the value of a currenty doesnt necessairly mean any of these variables will change. However, the value of a currency can be correlated with these economic variables. However, the direction of the correlation is not always clear, and my have different signs depending on the kinds of economic changes. For example, a people generally more willing to hold the currency of a high-GNP country. However, if that country is experiencing a large growth in nonimal GNP becasue of hyper-inflation, demand for that country's currency should shrink.
Qeustion 2: In general, a weak currency should help exports, which should improve an economy. However, a strong currency is associated with a stable, low-inflation economies, the preferred choice among investors. So, a strong currency could stimulate investment activities, which in turn, improves the economy.
Question 3. Most of the major countries have currency valuations that are determined in open markets. Smaller countries will often peg their currency to a major currency. For example, I believe Burmuda pegs their currency to the U.S. dollar. Finally, I can imagine that some countries peg thier currencies to the price of gold.
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