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M a k a ra n d A sh o k R a n e 25
Foreign Exchange rate refers to the rate at which one unit of currency of a country can be exchanged for the number of units of currency of another country.
In the words the rate of exchange measure number of units of one currency which is exchanged in the foreign market for one unit of another.
US $ 1 = Rs.45.18
Fundamental Reasons: - Balance of Payment surplus leads to stronger currency. - Economic Growth Rates High/Low growth rate. - Fiscal / Monetary Policy- deficit financing leads to depreciation of currency. - Interest Rates currency with higher interest will appreciate in the short term. - Political Issues Political stability leads to stable rates
Technical Reasons - Government Control can lead to unrealistic value. - Free flow of Capital from lower interest rate to higher interest rates. Speculation higher the speculation higher the volatility in rates
Continued.
2010
January February March April May June July August September October November December
Observation
It was observed that the Euro exchange rate was stable and showed increasing trend for the initial 9 month of 2009. It had increased from INR 64 per EURO to that INR 70 per EURO till September 2009. But Since October 2009 EURO started depreciating and reached its lowest in last 3 years i.e. INR 56 per EURO, by June 2010. Since the launch of EURO in December 1998 It had always showed an increasing trend, and this period of 9 months from October 2009 to June 2010 was an exception.
Years of unrestrained spending, cheap lending and failure to implement financial reforms left Greece badly exposed when the global economic downturn struck. The debt levels and deficits that exceeded limits set by the Euro-zone were revealed & exposed. In the first quarter of 2010, the national debt of Greece was put at 300 billion, which is bigger than the country's economy. The country's deficit is 12.7% of the GDP. In addition to this even Spain, Portugal, and Ireland also joined the party worsening the situation further.
Continued.
Spain
Spain has a fiscal deficit equaling 10% of GDP, unemployment close to 20% and its GDP was expected to contract by 0.5% that year.
Portugal
Portugal's deficit was a tad lower at 8.5%. The economy was expected to grow from hereon but only at a modest 0.5%. Even if fiscal deficit falls, total debt would rise to 90% of GDP.
Ireland
Ireland recorded deficit of 14.3% of GDP. Unemployment was still running at a high 13.5%. GDP contracted by 7% last year and is expected to contract in 2010 year as well by 0.9%. Meanwhile, the countrys borrowing costs have shot up from 1.7% to 3.5% for a 2 year loan.
Conclusion
In early 2010, fears of a sovereign debt crisis, the 2010 Euro Crisis developed concerning some European states This led to a crisis of confidence as well as the widening of bond yield spreads and risk insurance on credit default swaps between these countries and other EU members On 2 May 2010, the Eurozone countries and the International Monetary Fund agreed to a 110 billion loan for Greece, conditional on the implementation of harsh Greek austerity measures On 9 May 2010, Europe's Finance Ministers approved a comprehensive rescue package worth almost a trillion dollars aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility
Continue.
All the above actions by European governments and IMF rattled the investors and economies for the world. Financial speculators and hedge funds started selling EUROS There was sudden decrease in the demand for EURO throughout the world and USD Prices for USD started rising In response to accusations that speculators were worsening the problem, some markets banned naked short selling for a few months
Continued.
Continued.
2008
January February March April May June July August September October November December
Observation
Over the years it has been observed that USD was a good and stable currency with average price of INR 45.5 per USD during the period of 2000-2007. Since March 2007 USD started depreciating and it touched the 10 year exchange rate of INR 39 per USD as of January 2008. USD has shown a sign of recovery slowly and gradually over a period of 1.5 years and again reached its original desired level of INR 48 per USD in October 2008, which was also quite high. Since liberalization in 1992 USD has constantly appreciated form INR 18.33 per USD to INR 45 per USD till 1st quarter of 2007, without any major fall till January 2007 .
Real estate prices rose in the early years of this decade, and securitization provided more working capital for mortgages, lenders relaxed their underwriting criteria in order to issue more mortgages. Investors demanded higher returns on their investments and raised demand for MBSs and CDOs backed by subprime mortgages. Between 1995 and 2005, subprime mortgages increased from 5 % to 20 % of the mortgage market. By 2006 subprime mortgages had increased to more than $600 billion.
Continued.
In 2006, short-term interest rates rose while the value of homes leveled off or dropped. Borrowers with financial difficulties could not refinance or sell their homes to pay off mortgages when they were unable to make monthly payments. Default rates on subprime mortgages increased significantly in late 2006 and 2007. With rising defaults, purchasers of mortgages sought to force lenders to buy back nonperforming mortgages. Many smaller lenders that were inadequately reserved and unable to comply with such repurchase demands filed for bankruptcy.
Conclusion
Between June 2007 and November 2008, Americans lost more than a quarter of their net worth. Housing prices had dropped 20% from their 2006 peak During 2007, at least 100 mortgage companies either shut down, suspended operations or were sold. The crisis caused panic in financial markets and encouraged investors to take their money out of risky mortgage bonds and shaky equities and put it into commodities as "stores of value. Financial speculators seeking quick returns have removed trillions of dollars from equities and mortgage bonds, investing in food and raw materials.
Continued.
As of August 2008, financial firms around the globe have written down their holdings of subprime related securities by US$501 billion. When Lehman Brothers collapsed during a two day period in September 2008, $150 billion were withdrawn from USA money funds. This is the reason why strongest currency in Universe faced downturn
It was mainly because of the above mentioned subprime mortgage crisis investors around the world lost faith in US Economy and started withdrawing their investments from the country. This in turn reduced demand for USD and lead to strengthening of EURO at the same period.
The Subprime Mortgage Crisis: An Overview of the Crisis and Potential Exposure (Research Paper) By Edward J. Kirk
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