Foreign Exchange Project Euro Currency Analysis Is Essay

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Foreign Exchange Project

Euro Currency Analysis

Analysis is the toughest work of the world it needs ad hoc research and critical speculations. Analysis of a thing has a meaning of manifold. There are numerous kinds of analysis includes financial analysis, investment analysis, ethical analysis, character analysis, credit analysis and equity analysis. The idea presented in all of these analyses is somewhat some but the way of doing varies from analyst to analyst. It is a universal fact that the result of two analysts can be matched with each other because every analyst analyzes the things from different angles.

This particular analysis is all about the currency. The currency which has been for this particular piece of work is Euro currency which has been using in almost 90% of the European countries. Apart from that, we have to compare three countries which use Euro. The countries which have been compared in this paper are Germany, Ireland and Finland. The analysis has been broken into different sections; the first section is about analyzing the interest rates in European Region.

Interested Rates Analysis

The level of interest rate has negative correlation with the overall gross domestic product (GDP) of a country (Gail & Makinen, 1998). With the increment in the level of interest rate, the GDP of the country decreases because the cost of borrowing is increasing (Gail & Makinen, 1998). Due to the high cost of borrowing and high cost of business the consumers become reluctant to borrow amounts from the banks. From the past few years, the situation of the entire Europe is quite miserable merely because of the severity of the current economic crisis.

Years

Interest Rate of Euro

2005

3.25

2006

4.75

2007

5

2008

3

2009

1.75

2010

2

The interest rate of Euro was around 3.25% and culminated up to the level of 5% in the year 2007 because of the high growth of industries especially the financial industry in that era. The year 2008 was the year in which the current economic slump struck with the economies throughout the world. The European Central Bank (ECB) decreased the key policy rate to 1.25% in the year 2009 to enhance the borrowings and credit enhancement. High interest rates decrease the value of the currency because in the market excessive amount of currency prevails, while in the shortage of currency prevalence in the market the interest rate usually decreased.

Countries Comparative Analysis

Euro is basically a currency of Europe which had been made to beat the British Pound. There are number of countries in which Euro has been used, but only three have been selected which are Germany, Ireland and Finland. The Euro is far stronger than that of the U.S. Dollar. Currently the Euro trades against the U.S. dollar @ a rate of 1.4571 EUR/USD, it means a person has to give 1.457 U.S.$ to get 1 Euro.

Relationship between interest rates and value of the currency

In the theory of economics, if the absorption ante in one country increase, again the bill amount of that country will access as a reaction. If the absorption ante decrease, again the adverse aftereffect of depreciating bill amount will booty place. Thus, the axial coffer of a country ability access absorption ante in adjustment to "defend" the bounded bill by causing it to acknowledge in amount in account to adopted currencies (Mahr, 2008).

Sometimes the countries decrease the value of their currencies to make their products cheaper in the foreign countries. The European region did the same thing to increase their exports and decrease the imports. ECB has decreased its key policy rate in the year 2009 by 125 basis points to increase the level of exports as well as borrowings.

These three countries which we have selected were in a severe distress during the current economic crisis of 2008. Mentioned below chart of EUR/USD shows that the Euro Currency was actually depreciated in the year 2008 and they drive to the highest level of today.

It can be seen that in the mid of 2008, Euro was not as strong as it present again U.S. Dollar because of the low income generation of the European Commercial Banks. The interest rate of Euro at that time was 3.75 which then decreased up to 1.25% per annum by the ECB to enhance the borrowings within the country. Thus one can say that the fluctuation of the interest rate is merely due to the value of the currency against the U.S. Dollars as far as Euro Currency is concerned.

Any relationship between balance of trade and value of the currency

Before establish and analyze the relationship between the balance of trade and value of the currency, it is desirable to know about the balance of trade.

Balance of Trade (hereafter BOT) is one of the most common terms of Economics. A BOT is basically a Net Export which can be computed as (Exports -- Imports) (Benjamin & Cohen, 1999). In other words, it can be said that the difference between the monetary value of exports and imports over a certain period of time is called the BOT. Net Exports will then become the part of the country's Gross Domestic Product (GDP), it means that higher exports create the trade surplus which then increase the overall GDP of the country and lower exports create trade deficit which ultimately decreases the GDP of a country as a whole (Benjamin & Cohen, 1999).

There is a strong relationship between the BOT and the value of the currency as with the decrease in the value of currency, the stance of exports will increase which then ultimately widens the difference of exports and imports. High value of currency eventually decreases the difference between the exports and imports and subject to lower the GDP of the country. Countries like Japan and Germany makes their currency down to increase the level of exports within the country merely to increase the export orientations.

Labor force -- its sophistication and availability

Labor force is very important for an organization to increase its profit base. Likewise for an organization, large and sophisticated workforce is also a dream for a country to achieve. Countries strive hard to search and make a sophisticated labor force within its region to increase the pace of production and earnings within the country (Serge & Guyne, 2004).

The sophistication and availability of the labor force entirely depends upon the currency power of a country or exchange rate of a currency. Usually people belong to under developed and developing countries like to work in developed countries because of the high currency rate. For example, an Indian loved to work in the United States on lower level but an American would not want to work in India on the same level or designation. The reason behind this particular is the heavy difference among the exchange rates of both of these countries.

European region or the countries come under the umbrella of European Union (EU) are known as developed countries wherein the power of the currency is quite high and this power attracts the talent from all over the globe (Serge & Guyne, 2004). According to estimation Euro currency is the currency of high travels because it is the single currency which has been exchanged in so many hands. European regions usually give higher salaries to the employee working there that is why the availability of sophisticated and hard workforce in that region is possible as compared to other developed countries.

The sophistication of the availability of labor force has a direct effect on balances, trends, interest rates, balance of trade and value of currency. Obviously, the more you work, the more productive you are and subject to high income as compared to others who do not. Due to the high unemployment…[continue]

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