Factors/Determinants Affecting Exchange Rate Fluctuations and Its Impact on a Country's Trading.(Proposal)

Factors/Determinants affecting exchange rate fluctuations and its impact on a country’s trading

Introduction

Other than factors such as interest rates and inflation, exchange rate is one of the most important determinants of a country’s economic health. Exchange rate plays an important role in a country’s trade, which is critical to most free market in the world. Exchange rate is the rate at which one currency may be converted into another. It plays a critical role in a country’s economic health as they determine the level of imports and exports of a country.

A currency exchange rate can be categorized as fixed, free floating or pegged. In a pegged exchange rate system, the home currency’s value is pegged to a foreign currency and moves in line with that currency against other currencies where as free floating exchange, exchange rates are determined by market forces. In fixed exchange rate system, exchange rates are either held constant or allowed to fluctuate only within very narrow bands.

Having described these three exchange rate system, the exchange rate would still fluctuate be it fixed or free floating. Fluctuations in exchange rates are inevitable. What causes the exchange rates to fluctuate? And what is its impact on the trade of a country? If a domestic currency appreciates in relation to a foreign currency, the imported good would be cheaper in the domestic market and local companies would find that their foreign competitor’s goods become more attractive to customers. If the country has strong currency then its goods become more expensive in the international market, which results in lost competitiveness.

Problem statement.

In regards to the topic above, I would like to analyze why are there fluctuations in exchange rates. Other than that, I would like to also analyze what is the impact of fluctuations in exchange rates on global trading.

Objective

The objective of my research is to assist me in getting a...