Foreign Exchange Rates

One of the major complaints companies and individuals have with foreign exchange rates and flexible exchange rates is that they are too volatile because they float. Several factors contribute to the volatility of the rate of exchange. These include the balance of trade, currency substitution, the differential speed of adjustment of asset markets vs. goods markets, and the news. The balance of trade affects the exchange rate because countries are always shipping goods back and forth (O'Sullivan & Sheffrin, 2003). If a country really needs a particular good, it will be willing to pay more for that good than it would if it did not need the good as strongly. Countries that have more leverage from a trade standpoint can also affect the exchange rates, because the balance of trade is very different for countries that are strong than for countries that are weak when it comes...
[ View Full Essay]