EECS 1710 Lecture Notes - Lecture 10: Foreign Exchange Market
24 Jun 2018
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EECS 1710 Lecture 10 Notes
Introduction
Impact of Signals on Currency Speculation
Investors who owned euro-denominated securities attempted to liquidate their
positions before the euro’s value declined.
These conditions played a large part in the euro’s substantial depreciation during this
period.
When a country experiences a crisis, its economy typically weakens and political
problems often arise.
These conditions lead to reduced demand for the country’s currency because investors
are wary of countries experiencing economic or political problems.
These conditions also lead to an increase in the supply of the country’s currency for sale
in the foreign exchange market because foreign investors who previously invested in the
country now want to get out.
In some cases, even the local citizens sell their local currency in exchange for other
currency so that they can move their money out of the country.
Thus, any concerns about a potential crisis can trigger money movements out of the
country before the crisis develops.
Yet such actions can themselves cause a major imbalance in the foreign exchange
market and a significant decline in the local currency’s value.
That is, expectations of a crisis may lead to conditions that make the crisis worse.
The affected country’s government might even attempt to impose foreign exchange
restrictions in order to stabilize the currency situation
This possibility may create still more panic because investors fear that their money will
be subject to crisis conditions.
Day-to-day speculation on future exchange rate movements is typically driven by signals
of future interest rate movements, but it can also be driven by other factors.
Signals of the future economic conditions that affect exchange rates can change quickly
Document Summary
Investors who owned euro-denominated securities attempted to liquidate their positions before the euro"s value declined. This possibility may create still more panic because investors fear that their money will be subject to crisis conditions. Day-to-day speculation on future exchange rate movements is typically driven by signals of future interest rate movements, but it can also be driven by other factors. Signals of the future economic conditions that affect exchange rates can change quickly. Hence speculative positions in currencies may adjust quickly, which increases exchange rate volatility. Euro-denominated securities attempted to liquidate their positions before the euro"s value declined. These conditions played a large part in the euro"s substantial depreciation during this period. When a country experiences a crisis, its economy typically weakens and political problems often arise. These conditions lead to reduced demand for the country"s currency because investors are wary of countries experiencing economic or political problems.
