From my personal notes


Factors Influencing Exchange Rates

  • Inflation - Higher inflation weakens currency. This is because goods become more expensive, and it becomes less attractive for investors to do business.

  • Interest Rates - Higher interest rates will strengthen currency. More interest rates means foreign investments can yield more.

  • Trade Balance - Trade deficits weakens currency. When a country imports more than it exports, there is a lower demand for its currency in international markets. 

  • Public Debt - Large debt weakens currency. It encourage inflation since gov will print more money. Why? If inflation is high, debt can be paid off with cheaper real dollars due to inflation.


Weak Currency Effects

  • More Exports, Less Imports - Good for local producers like manufacturers, farmers, brands. Nationalist.

  • More Tourism - Cheaper for tourists

  • Less Attractive for Foreign Business and Investments - Capital depreciation

  • Brain Drain - Talented people can easily earn more money in country with stronger currency.


What Goes Up when Currency Weakens

  • Commodities - Gold, silver and raw metals goes up when currency weakens. As the dollar falls in value, it takes more weaker dollars to purchase a commodity

  • International Stocks - International stocks earn revenue in other currencies. When they convert back to USD, it will be more.

  • Higher Exports (reduce trade deficit) - A weaker dollar makes U.S. products more affordable abroad, increasing demand for exports. Companies with more overseas revenue can exchange more USD back.

  • Tourism - International travelers have more spending power.


Example of taking advantage of Exchange Rates

  1. In an ideal scenario, you make money in SGD (strong currency).

  2. Convert it to convert USD to invest in US stock market (high yield).

  3. Spent it in country with weakening currency like JPY (weaken currency).


How does countries protect their currencies?

  • Country have FX reserves holding other currencies. 

  • For example when Japan wants to strengthen JPY against USD, they will sell USD to buy JPY.


Why Singapore use exchange rates to control inflation

  • Gross exports and imports of goods and services are 3X the GDP.

  • 40% of expenditure in SG is on imports. 

  • Most countries use interest rates to control inflation, but not SG.

  • For SG, exchange rate has a much stronger influence on inflation than domestic interest rates.

  • Stronger SGD will reduce inflation. Cheaper to buy goods.