Determinants Of Exchange Rate

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The United States' current exchange rate system is also known as a managed float exchange rate system. In other words, the demand and supply sector of the US economy is a major determinant of the value of our currency. Overtime, the US dollar has fluctuated widely in value which is clearly depicted on page 607 of chapter 18. It is evident that although the US dollar gained value against the Canadian currency from 1973-2008, it lost value in comparison with the Japanese yen between the same years. Determinants of the exchange rate values in the short run may include changes in interest rates as well as changes in future expectations of currency values. When considering exchange rates, I only thought about it upon traveling to other countries; however, I never really linked it to routine aspects of our daily lives. For example, some people find it hard to believe that our gas prices are still increasing despite the fact that the value of the dollar is declining. When the US economy is weak, interest rates will fall and investors will choose to place their money with other currencies because they know they will incur a higher return. Thus, as the dollar falls, there is less demand of it. Oil is priced by dollars in the world market and as the value of the dollar declines, the value of foreign currency gets stronger. A news article introduced an example that I felt was quite clear: Assume that a barrel of oil costs $100 and $100 is equal to 70 euros. If the US dollar decreases

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