Foreign Exchange and Global Economy

Executive Summary

Under the current regimes of Dollarization or Euroization, the United States Dollar or Euro are acting as a legal tender in some of the different countries. The dollarization is employing the foreign currency for the production of all types of money services that are needed in a local economy. The monetary policy at the same time is delegated sometimes to the country that is anchoring the whole process. Under the regime of the dollarization, the exchange rate movements are not likely to buffer or absorb the external shocks that are seen in the economy. At the same time, the way it works is that there is a currency board in that country that is managing the external problems of the credibility and thus they try to discipline their banks by bounding them with arrangement. The currency board takes into consideration three things, the exchange rate must be fixed to another such currency and it must be anchoring that currency. The convertibly is up to the domestic country when it comes to the exchange of the domestic currency whenever it is being needed and desired. At the same time, the country is not allowed to switch between the system, if the country has decided to adopt a certain system,, then it must make sure that it is abiding by that system. There must not be lot of deviation from the current system. A currency crisis is the crisis that is also termed as the balance of payment crisis. It is a sudden devaluation of the currency. When the currency is devalued suddenly, there is lot speculation among the investors in the economy and in the foreign exchange market. The currency crisis might jolt the economy as it might result in the extreme imbalance in the payments and there might be deficit in the economy. The ability of the government to back its currency comes under the scrutiny. The governments that are pursuing the fixed exchange rate system are more likely suspects of the fixed exchange rate system as compared to the systems of the floating regime. Pretty much like some of the other economic crisis, the currency crisis also prompts up the real economic crisis. The smaller economies and the economies that are involved in trade are mostly susceptible to these problems as compared to stable economies.

Introduction6

Bretton Woods System7

Growth in the United States Reserve7

Downturn in the Economy and Trade Deficit8

Emergence of Dollar as a Global Currency8

Theoretical Framework of Flexible Exchange Rates9

How it is Practiced9

Advantages of Flexible Exchange Rate9

Purchasing Power Parity Theory10

Balance of Payments Problems in United States10

International Factors11

Importance of a Strong Dollar12

Effect on the Price of the Domestic Goods and Exchange Rate13

Balance of Payment in other Economies13

Currency Crisis14

Example of Currency Crisis14

Why Capital Flows can be Helpful15

Effect and the Impact of the Short Term Capital and Asian Financial Crisis16

Countries Most Affected by Crisis17

Devaluation of the Chinese Currency and Japanese Yen18

Performance of the US Dollar since 2008 Recession18

Value of the United States Dollar Index18

Increase in the Investment in ...