International relations are based on the use of national currencies. These include various means of circulation: coins, banknotes, payment documents, securities, precious metals, etc. Depending on the level of integration of the country into the world economy, the currency may turn in different ways. The exchange of a national unit is a prerequisite for international trade.
The exchange rate is the value of the country's currency, expressed in the payment symbols of another state. It connects the economy with the outside world, allows for international transactions.
The ability of citizens of the country and non-residents to freely buy and sell banknotes is called convertibility. Any restrictions on such operations by the Central Bank or the state turn the currency into a partially convertible. Free conversion is possible only in an economically stable country. Legislative permission alone is not enough, one must also have confidence in the monetary unit and a high assessment of the level of development of the country.
The basis of the conversion is currency parity. But in practice, currency rates never coincide with it, since supply and demand are not equal. Under the conditions of an active balance of payments, the foreign exchange rate on the domestic market drops, while the national one is growing. The reverse situation occurs in a passive balance. Therefore, in most countries at the same time there is an official and free exchange rate. According to the first, the Central Bank makes settlements with international organizations, and according to the second, between individuals.
Quotation - the fixation of the national currency in foreign. They are of two types: direct (price, for example, a dollar in the domestic market) and inverse. If the value of one currency is expressed through the other two, then this is a cross rate. The need for it arises if the exchange of direct quotations between two monetary units is very small.
The demand for currency is determined by the interest of other countries on domestic goods. To pay for the purchase, foreign countries must conduct a currency exchange.
1) the demand of a given country for foreign goods;
2) interests in financial assets of other states.
How to calculate the value of the currency
The price changes every day under the influence of various macroeconomic factors. The Central Bank of the Russian Federation publishes daily courses in special bulletins. The basis for these calculations are:
1. Quotes of the last exchange day on operations “US dollar - Russian ruble”.
2. The official exchange rate set by the IMF for the previous working day.
3. Prices for other currencies are calculated by the Bank of Russia on the basis of their quotations to the dollar in the international, stock market segments of the domestic market, as well as the levels set by the Central Bank of the respective countries.
Factors affecting the exchange rate
At the time of the gold standard, purchasing power parity was determined by the content of the precious metal in monetary units, and the price fluctuated within 1%, that is, the cost of transporting coins. In terms of paper circulation, it changes daily, so it became necessary to study the laws of its fluctuations. Price is influenced by supply and demand.
A change in the exchange rate affects the state of foreign trade, affects the result of the activities of organizations, the level of employment, etc. Therefore, government intervention in such relations is necessary. But its intensity depends on the goals and a set of economic levers. Actions can be directed both to the reduction (devaluation) of the value of the national monetary unit, and to its increase (revaluation).
The exchange rate may change under the influence of the balance of payments of the country - the ratio of the amounts received and paid. The surplus indicates an increase in demand for the monetary unit by foreign borrowers, thus strengthening it. Passive is the increase in interest in foreign currency, the depreciation of the national.
Changing tastes of buyers. Increased demand for imported services will lead to lower prices for the national currency. And increasing interest in domestic services will help increase its value.
State policy in foreign trade. The exchange rate will increase if imports are restricted by the state. But the widespread use of such measures can have negative consequences, since the volume of international trade will be greatly reduced.
The change in income buyers. With the growth of the amount of temporarily free funds increases the consumption of goods (imported and domestic), the demand for foreign currency. In the market, this will be reflected in a depreciation.
Inflation. Other things being equal, this process is inversely proportional to the course. If prices in one country grow faster than in another, then imported goods will cost less than domestic ones. Accordingly, the value of the national currency will decline. The desire of people to save real incomes by buying foreign currency will only aggravate the situation. But, since the supply of the monetary unit remains unchanged, inflation will lead to a depreciation. Therefore, it is customary to calculate purchasing power parity (PPP). This is the real price of the ruble, expressed in the currency of another state. The calculation is carried out for similar goods. Example: the consumer basket in Russia is 7,000 rubles. and in the USA - $ 100. The ratio of rates will be: $ 1 = 70 rubles. or 1 rub. = 0.01 dollars.
The value of real interest rates: the higher they are, the more attractive a given country is for investments. But, on the other hand, their growth causes a rise in the cost of a loan. If entrepreneurs do not have enough own funds to finance economic activities, the resulting loan capital with high interest rates will lead to higher costs, higher prices for products and reduced attractiveness of the national currency. That is, this factor can have a double influence on the dollar exchange rate.
State regulation of the economy: the use of foreign exchange reserves, trade, financial and monetary policy.
Other factors affecting the exchange rate:
1. The publication in the media of important economic data: inflation, balance of payments deficit, unemployment rate, discount rates, stock market indices, stock prices, bonds, GNP, election race, etc.
2. Major transactions of commercial financial organizations.
3. The factors of the exchange rate, the impact of which can not be predicted (we are talking about wars, revolutions and other disasters).
4. The Central Bank can have a direct impact on the course by buying or submitting currency in large lots. This causes sharp fluctuations in the ratio. The regulation of interest rates and the volume of money supply does not have such a strong effect on the value of the ruble.
5. Insurance, hedge, pension and other funds invest money in currencies, trying to avoid the risks of devaluation. Such operations - especially with large amounts - significantly affect the exchange rate of the country.
6. The cost of gold and oil.
Exchange rate regulation
Foreign exchange interventions are operations of the Central Bank for the purchase and sale of a country's monetary unit. To increase the rate, the central bank must sell foreign currencies, thus reducing the demand for them. And to downgrade - to perform the opposite operation.
Discount policy is a change in the discount rate that affects the price of a loan in the domestic market. With a passive balance of payments, its growth can serve as a stimulus for capital inflows. By reducing the rate, the Central Bank is counting on an outflow of funds, which will reduce the active balance and lower the rate.
- The blockade is a sanction in the form of unilateral restrictions by one state or group of countries of another power, which will not allow the use of its bank notes;
- prohibition of foreign currency free circulation;
- regulation of international transactions;
- movement of capital, gold, securities;
- concentration of foreign currency in the hands of the state.
Types of exchange rates
There are several classifications. By time:
1) spot - the exchange rate, which is held no more than 2 business days after the adoption of the quotation;
2) forward - the future value of the national currency, expressed in a foreign one.
The types of exchange rates that are used to identify real trends in movement:
1) nominal - current quotation;
2) real - this is the recalculated value of the monetary unit, taking into account inflation;
3) nominal effective - the ratio of the national currency and the currencies of the partner countries;
4) real effective exchange rate - nominal, calculated taking into account price movements.
According to the degree of rigidity:
1) fixed - a clear price ratio;
2) limitedly flexible - may vary within certain limits;
3) floating - established on the basis of supply and demand.
There are also hybrid types: controlled swimming, creeping fixation and currency corridor - these are the limits of price fluctuations that are set by the Central Bank. Its main feature is that the limiting relations are strictly limited and fixed by law. The currency corridor is introduced in the absence of free capital, due to the large deficit, internal and external debt.
Exchange rate regimes
“Currency” in translation means “value”. Let's give an example. Just 100 years ago, the value of money was determined by the volume of gold reserves held by the state. But after World War II, most of the precious metal was concentrated in the United States. Then there was a transition to the gold (Bratton-Woods) system, according to which:
- the reserve currency is the US dollar;
- the treasury, if necessary, will exchange it for gold (35: 1);
- all national currencies in a certain ratio were “tied” to the dollar, and through it to the most expensive metal.
Then the monetary unit of the richest country in the world (USA) replaced gold in international payments. But after Japan overtook American production growth rates, the European Economic Community (1954) was formed, which included France, Germany, Italy, Belgium, the Netherlands and Luxembourg. The competitiveness of goods from the United States has decreased dramatically. Countries in which dollars were in large quantities began to show them to the treasury in order to exchange for gold. And after the precious metal ran out of money, the USA devalued the currency. 03/19/1973, a new system was introduced.
A fixed rate is established and maintained by the intervention of the Central Bank at a certain level. Consider this on the example of the ratio of pounds to the dollar. If the demand for the UK currency increases, then its rate rises. The task of the Central Bank is to fix it clearly at a certain level. To do this, the bank must buy foreign currency. As a result of increasing demand for imported goods, the value of the pound in dollars is declining. The Central Bank must reduce the availability of the national currency by exchanging dollars for it.
With the growth rate decreases foreign exchange reserves. The demand for goods leads to an increase in exports, that is, the inflow of foreign currency. This causes a balance of payments surplus. In this situation, the Central Bank should increase the supply of national currency, buying foreign. This will lead to the replenishment of the country's cash reserves.
Due to the growth of imports, the rate decreases, capital outflows out of the country, the balance becomes negative, and a deficit occurs. To finance it, it is necessary to reduce the offer of the national currency by buying it.
With a fixed rate, the balance of payments is:
Current operations (Xn) + Capital movement (CF) = Dynamics of changes in reserves (R).
A fixed exchange rate, which is accompanied by a chronic surplus or balance of payments deficit, can cause a lot of problems. In the first case, there is the possibility of excessive accumulation of reserves, which can lead to inflation. In the second - there is a threat of depletion of foreign exchange reserves. In any of these situations, the Central Bank will have to officially change the price of the currency, that is, cause a revaluation or devaluation.
Floating exchange rates are governed by the market mechanism: supply and demand in the market, without government intervention. The balance of payments is:
In such a situation, the deficit, that is, low demand for domestic goods, is financed by the flow of funds. Depreciation is called depreciation. This makes domestic goods cheaper, contributes to the development of exports. The surplus is financed by the outflow of funds. If domestic goods are in great demand, the interest of foreign investors grows with the exchange rate of the national currency. Such a situation is called appreciation. Foreigners are buying money in this country. This reduces exports by stimulating imports and lowering the national exchange rate.
The modern system can not be called completely flexible. The US Federal Reserve and the European Central Bank does not allow the dollar to fluctuate freely in order to prevent a sharp fall (as in 1985). Therefore, they buy it, artificially increasing demand and maintaining a higher rate.
Situation in the domestic market
In the Russian Federation, the currency corridor first appeared on June 6, 1995. Since 1996, a sliding peg of the ruble to the dollar has appeared. Such a system is called the sloping currency corridor. The price change depended on the projected inflation levels with small deviations. Since 2008, the two-currency corridor began to operate, which adhered to the reserves of the Central Bank.
The value of the ruble in the national currencies of other countries depends largely on the volume of exports.
Correlation of the Russian currency with USD and EUR
In April 2014, the ruble reached the historical level in relation to the dollar (1:50), and then dropped sharply (to 36). Although fluctuations are common in floating-price countries, the changes that took place last year were difficult to predict.
For a long time, the Central Bank did not dare to raise the key rate, on the basis of which the refinancing of the banking system takes place. In recent months, the Bank of Russia “sponsored” the CB in the amount of 5 trillion rubles. The main source of such investments is loans secured by securities and non-market assets. With the weakening of the ruble, free cash resources of the KB were directed to the foreign exchange market. Today it is more profitable to conduct speculative operations than to invest in the economy. In order to avoid such situations, the European Central Bank has raised interest rates since last year. The Bank of Russia, on the one hand, restricted the flow of capital to 5.5%, and on the other, it held back the devaluation of the ruble at the expense of the gold and foreign exchange reserve. And only in March 2014, he raised the discount rate to 7%. This decision was caused by the need to raise metallurgy and the mining industry. They have become almost unprofitable. The only way to remedy the situation is to weaken the ruble against the dollar.
The exchange rate reflects the value of the national monetary unit through a foreign one. It should be regulated by the state and the Central Bank. If a clear correlation is established, then this is a fixed rate. If the price fluctuates depending on supply and demand - floating. These exchange rate regimes support a certain price ratio.