Republic of the Philippines

CAVITE STATE UNIVERSITY

Silang Campus
Biga I, Silang, Cavite

Research Assignment: Exchange Rate and Currency

In Partial fulfillment for the course

International Trade and Agreements

Orence, Lady Ariana D.

Instructor:

Prof. Antonio G. Batad , DHum (h.c) MMEM, CPM, CLSSGB, PMEC, FOPD
I. What is an Exchange Rate?

An exchange rate is the rate at which one currency can be exchanged for another between
nations or economic zones. It is used to determine the value of various currencies in relation
to each other and is important in determining trade and capital flow dynamics.

Understanding Exchange Rates

Exchange rates are quoted between two currencies. Exchange rates can also be defined as the
price that one nation or economic zone’s currency can be exchanged for another currency.
The rates are impacted by two factors:

1. The domestic currency values

2. The foreign currency values

In addition, the rates can be quoted either directly or indirectly or with the use of cross-rates.

Direct Quotation vs. Indirect Quotation

Direct quotation of exchange rates involves quoting the price of a unit of foreign currency
directly in terms of the number of units of domestic currency that are exchanged.

Indirect quotation of exchange rates involves expressing the price of a domestic currency in
terms of the number of units of foreign currency that are exchanged.

Cross Rates

Cross rates are a method of quoting exchange rates in which various foreign currency
exchange rates are used to imply a domestic exchange rate, e.g., if you wanted to determine
the EUR/USD exchange rate but can’t access a direct quote. You could use the EUR/CAD
exchange rate and the CAD/USD exchange rate to infer the EUR/USD rate.

Importance of Exchange Rates

Exchange rates capture a lot of economic factors and variables and can fluctuate for various
reasons. Some of the reasons that exchange rates can fluctuate include:

1. Interest Rates

Changes in interest rates impact currency value and exchange rates. All else being equal, a
higher interest rate in a domestic country will increase the demand for a domestic currency
since more foreign investors will seek to invest at the higher interest rate, thereby investing
foreign capital into the domestic currency. However, in practice, it is balanced out by
inflationary pressures.

2. Inflation Rates

Changes in inflation rates impact currency value and exchange rates. All else being equal, a
higher inflation rate in a domestic country will decrease the demand for the domestic
currency since the value of the currency depreciates relatively faster over time than other
foreign currencies.

3. Government Debt

Government debt is the amount of debt owed by a federal government. It impacts currency
value and exchange rates since a country with higher debt is less likely to acquire foreign
capital, which, in turn, leads to inflation. It puts downward pressure on the domestic currency
and decreases its value in exchange rates.

4. Political Stability

The political state of a country influences the currency value and exchange rates since a
country with higher political turmoil is less likely to attract foreign investors. Political
instability fosters more risk for investors, as they are unsure of whether they will see their
investments protected via fair market practices or a strong legal system.

5. Export or Import Activities

A country’s net exports or imports impact currency value and exchange rates. A domestic
country that exports more goods than it imports will experience a higher demand for its
currency, and thereby, will see its exchange rate increase relative to other foreign currencies.

6. Recession

A country that experiences a recession is less attractive to foreign investors. Firstly, it is due
to the increased risk of investing in an economy with a poor economic outlook. Secondly,
when a recession occurs, interest rates typically decrease, which decreases the foreign
demand for domestic currency.

7. Speculation
 If a country’s currency is expected to rise for any reason, investors will demand more of the
currency to realize a profit based on that expectation. It can cause immediate demand
increases for domestic currency relative to foreign currencies.

8. Special Considerations

There are other special considerations when exchange rates are determined. For example,
various “safe-haven” currencies are believed to be stable and attract foreign capital when
the global economic outlook is uncertain. It includes currencies such as the U.S. dollar, euro,
Japanese yen, and Swiss franc.

Another special consideration for the U.S. dollar is that it is the global federal reserve
currency, which increases the baseline demand for the U.S. dollar relative to other currencies.

II. What is Currency?

Currency is something (such as coins, treasury notes, and banknotes) that is in circulation as a
medium of exchange, usually issued by a government and generally accepted at its face value
as a method of payment. Currency is the primary medium of exchange in the modern world,
having long ago replaced bartering as a means of trading goods and services.

In the 21st century, a new form of currency has entered the vocabulary and realm of
exchange: the virtual currency, also known as cryptocurrency. Virtual currencies, such as
Bitcoin and Ethereum, have no physical form or government backing in the United States.
They are traded and stored electronically.

Understanding Currency

Currency in some form has been in use for at least 3,000 years. At one time only in the form
of coins, currency proved to be crucial to facilitating trade across continents.

A key characteristic of modern currency is that it is worthless in itself. That is, bills are pieces
of paper rather than coins made of gold, silver, or bronze.

The concept of using paper as a currency may have been developed in China as early as 1000
BC, but the acceptance of a piece of paper in return for something of real value took a long
time to catch on. Modern currencies are issued on paper in various denominations, with
fractional issues in the form of coins.

What Does Currency Mean?

 The term currency refers to the tangible form of money that is paper bills and coins. It's used
as a medium of exchange that's accepted at face value for products and services as well as for
savings and the payment of debt.

What's an Example of Currency?

One example of currency is any of the U.S. paper bills you may have on hand. It is any of the
coins the U.S. issues, such as the penny, nickel, and quarter. Currency can also be the paper
bills and coins issued by the governments of other countries across the globe.

What's the Difference Between Money and Currency?

Money is an intangible system of value that provides the means for the ongoing exchange of
goods and services in a society. Money has taken many forms since it overtook the system of
bartering. Currency is a tangible form of it. So, instead of, say, bartering agricultural produce
for the clothing you may need, you can use currency (paper notes and coins) to obtain it.

III. 30 Currencies from different Countries

Currency Photo
Colombian Peso ($)

Pound Sterling (£)

Australian Dollar ($)

Indian Rupee (₹)

Mongolian Tugrik (₮)

Gibraltar Pound (£)

New Zealand Dollar ($)

Swiss Franc

Brunei Dollar ($, B$)

Israeli New Shekel (₪)

South African Rand ()

Chilean Peso ()
 Norwegian Krone ()

Zimbabwean Dollar ()

Danish Krone ()

East Caribbean Dollar ()

Hong Kong Dollar ()

Turkish Lira ()

Russian Rube ()

Central African CFA Franc ()

 Chinese Yuan ()

Japanese Yen ()

Falkland Islands Pound ()

Netherlands Antillean Guilder ()

Iranian Rial ()

Mexican Peso ()

Ghanian Cedi ()

Philippine Peso ()
 Malaysian Ringgit ()

Bolivian Boliviano ()

IV. How do exchange rate fluctuations affect international trade?

Changes in currency exchange rates affect international trade by increasing or decreasing

exports and imports. A strong domestic currency will cause exports to decrease and imports
to increase. As exchange rates decrease, exports rise and imports go down.

What is currency exchange and why is it important to international trade?

Currency exchange is the replacement of one currency for another currency. The rate at
which these exchanges take place is determined by a currency exchange rate. Changes in
currency exchange rates are important to international trade because the value of exports and
imports are impacted by currency exchange rates.

V. What is the lowest currency in the world?

The weakest currency in the world is the Iranian rial (IRR). The USD to IRR operational
rate of exchange is 371,992, meaning that one U.S. dollar equals 371,922 Iranian rials.

Why Is the Iranian Rial So Weak?

U.S. sanctions against Iran play a major role in the weakness of the Iranian rial. When the
United States withdrew from the 2015 nuclear deal between Iran and world powers in 2018, it
also reinstated sanctions on various Iranian sectors. Political unrest, protests, and a lack of
diplomacy also contribute to the poor value of the Iranian rial.

VI. What is the highest currency in the world?

If you’re wondering what currencies are better than the U.S. dollar, the best answer would be
the Kuwaiti dinar (KWD), the official currency of Kuwait, which is the strongest currency in
the world. The USD to KWD exchange rate is 0.31, which means that one Kuwaiti dinar is
worth roughly $3.
 Why Is the Kuwaiti Dinar So Strong?

The Kuwaiti dinar is so valuable because the demand for it is so high. This is due to Kuwait
having a strong, stable economy backed by vast oil reserves.

Other currencies that are stronger than the U.S. dollar include the Bahraini dollar, the Oman
rial, the Jordanian dinar, and the Gibraltar pound.

VII. Which currency is highly used in the world?

US dollar (USD)

Issued by the Federal Reserve (Fed), the US dollar is the official currency of the United
States. It is the number one most traded currency globally, accounting for a daily average
volume of US$2.9 trillion.1

There are several reasons for its popularity. Firstly, the US is the world’s largest economy
and a powerhouse in international trade. Secondly, the US dollar is the world’s primary
‘reserve currency’, held by central and commercial banks for the purposes of international
transactions and investment – estimated to make up nearly 63% of currency reserves by
volume.3 And thirdly, many commodities are priced in dollars, including gold, oil and
copper.

While the value of the dollar is primarily influenced by US economic performance and
demand for commodities, its value can also be influenced by fluctuations in the economic
performance of other countries that use the dollar – either officially or as their de facto
currency. These countries include Ecuador, Panama and El Salvador, among others.

Markets to watch: EUR/USD, GBP/USD and USD/JPY

VIII. 30 Examples of conversion

References:
Corporate Finance Institute. (n.d.). Exchange Rates.
https://corporatefinanceinstitute.com/resources/economics/exchange-rate/

Merriam Webster. (n.d.). Currency. In Merriam-Webster.com dictionary. Retrieved

December 14, 2023. https://www.merriam-webster.com/dictionary/currency

Investopedia . J.F. (27, June 2023). Currency: What It Is, How It Works, and How It Relates
to Money. https://www.investopedia.com/terms/c/currency.asp

Study.com. (n.d.). Exchange Rates on International Trade | Impacts & Examples.

https://study.com/academy/lesson/how-currency-changes-affect-imports-and-
exports.html#:~:text=How%20do%20exchange%20rate%20fluctuations,rise%20and
%20imports%20go%20down.

Madison Trust Company. (n.d.). The Strongest (and Weakest) Currencies in the World
Compared to the U.S. Dollar.
https://www.madisontrust.com/information-center/visualizations/strongest-and-weakest-
currencies-in-world-compared-to-us-dollar/#:~:text=The%20weakest%20currency%20in
%20the%20world%20is%20the%20Iranian%20rial,dollar%20equals
%20371%2C922%20Iranian%20rials.

IG.com. (n.d.). What are the top 10 most traded currencies in the world?
https://www.ig.com/en/trading-strategies/what-are-the-top-10-most-traded-currencies-in-the-
world-200115#:~:text=Academy's%20online%20course.-,US%20dollar%20(USD),volume
%20of%20US%242.9%20trillion.&text=There%20are%20several%20reasons%20for%20its
%20popularity.