As such, we may state that the exchange rate remained significantly stable over the period of time we have been analyzing so far.
On the other hand, it is much simpler to explain this decreasing exchange rate from an investment point-of-view. The American companies have found India to be one of the best resources of human potentials in the world. At incredibly low wages, ranging from 2-300 dollars to less than 1,000, one can hire extremely well-prepared scientists, programmers, researchers, etc.
As such, a cheap, but very qualified workforce has determined many American companies to choose India as an excellent place to outsource part or its entire production capabilities. The American investors in India drove demand for the Indian Rupee upwards and increased the rate from 48 to around 44 Rupees for a Dollar.
Explanations for the Mexican Peso-U.S. Dollar exchange rate need to be traced in the particularities of the Mexican-American bilateral partnership. The most important thing that needs to be mentioned is Mexico's extreme economic dependency on the United States. No less than 85% of all exports are to the U.S., with Canada covering most of what is left. Imports, on the other hand, are high as well, almost reaching 90% in many cases. Bilateral trade, as I have previously discussed, affects the exchange rate because it increases or decreases demand for a certain currency. When one's imports surpass the exports, we...
This is the case here as well: a commercial balance with a deficit will devaluate the Mexican Peso.
Unfortunately, in Mexico's case, the fact that the currency has been gradually devaluating against the dollar over the period of time (the graph points out that its best period was somewhere in May 2003, but afterwards it has devalued to reach 11.5 at the end of the period) needs to be associated with the country's internal situation as well. For one thing, we need to consider internal security and the way that the government is able to cover crisis and revolts which occur in the different regions of the country. Unfortunately, in many cases the authorities seem helpless against the fights between local drug dealers and cannot sustain a secure climate.
The most important effect of such facts is that foreign investors, the most important source of an growing demand for the national currency, are scared away by the internal political situation of Mexico. It is difficult to bring about profitable investments in a country that cannot guarantee for their safety, as well as your very own. As such, with the support for the exchange rate relying solely on the trade northwards, it is difficult to have currency performances.
Bibliography www.bloomberg.com www.reuters.com www.oanda.com
