Theexchange rate system is exceedingly critical since it helps indetermining the manner in which businesses will conduct business inthe international market for instance, companies dealing with globalbond market will be affected by the exchange rate system. This reportwill discuss an article related to the exchange rate system. Inaddition, concepts related to the article will also be discussed.
of the Article
Thearticle, Arising price for dollars borrowed overseas underscores thecrosscurrents roiling trading,points out that the price for purchasing dollar has increased.According to the article, a scramble for the United States dollars isrippling through the global markets a move that has led to thedriving up of the costs that foreign organizations and financialinstitutions pay in hedging against the currency swings (Eisen 1).The article argues that a rising price for dollars that are borrowedoverseas underscores the crosscurrents stirring up trade at a time ofdivergent central-bank policies as well as an epic commodity bust.The article is quick to indicate that although the WSJ Dollar Indexindicates that the dollar is 3.6% down in 2016, most investors andanalysts project that it is going to appreciate as much as 15% as theFederal Reserve attempts to raise the short-term interest rates(Eisen 2). The article also indicates that the demand for dollars isusually reflected in the additional cost to hedge instead of theexchange rate. The rising hedging costs have an effect on trading indeveloped-country government bonds. The article further indicatesthat according to Deutsche Bank AG, the dollar should continue tostrengthen as the unemployment rate in the U.S. keeps falling.
Discussionand Analysis of Key Concepts
Oneof the concepts that can be related to the article is theappreciation and depreciation of currency. A currency can be said toappreciate in case it increases in value in comparison to anothercurrency that is, the currency is in a position to buy more foreigncurrency units in the present than it could some time back.Alternatively, currency can be indicated to depreciate in case itdeclines in value in comparison to another currency that is, acertain quantity of the currency can buy fewer foreign currency unitsat the present time than it used to some time back. From thearticle’s point of view, this year, the dollar has depreciated by3.6% against the euro and by 7.3% against the yen (Eisen 3). This isto imply that this year, both euro and yen units can purchase moreunits of dollar compared to the units that the two currencies couldbuy in the past.
Economicrisk is another term that can be related to the article. Economicrisk describes the extent over which an organization’s futureinternational earning power is affected by changes in the exchangerates. An organization needs to reconfigure its operating structurein order to mitigate the economic risk. According to the article, theprice of exchanging dollar to other currencies is on the increase(Eisen 1). This indicates that organizations operating in theinternational markets are affected as they try to convert theircurrencies into dollars. Although some international businesses arebenefitting from the high cost exchange rates especially those thatare from the United States, others are not benefitting from the movesince they are making losses from the high costs or their profitshave been minimized. Thus, it can be argued that the economic riskfor the U.S. multinationals would be less compared to multinationalsfrom other countries in case the U.S. dollar continues to strengthen.This is because the international earning power for multinationalsfrom other countries would be affected by the high exchange ratesagainst the dollar. However, through the multinationals reconfiguringtheir operating structure, they would be capable of reducing theeconomic risk.
Fixedexchange rate systems and floating exchange rate systems are alsorelated to the article. Fixed exchange rate system describes a systemwhere a nation sets and keeps a target value for its currency.Alternatively, floating exchange rate system describes a system wherethe exchange rates of a currency fluctuate on the basis of marketforces. In this case, the government does not in any way intervene inorder to change the value of a currency. From the article, it isapparent that the dollar is strengthening and its demand hasincreased in hedging (Eisen 2) a move that has led to increase inthe price of exchanging dollar in relation to other currencies. Agovernment may either choose a fixed exchange rate system or afloating exchange rate system in order to fight for existence ofbusinesses. However, the two systems would have different benefits aswell as disadvantages therefore, it is important for a government toselect the system it wants to use wisely.
Furthermore,another concept that can be linked to the article is the globalmarket bond. The global market bond usually exists in terms offoreign bonds and Eurobonds. The foreign bonds are sold outside theborrower’s country and have the denomination of the currency of thecountry in which they are issued. Alternatively, Eurobonds areusually underwritten by a group of banks and placed in countriesother the one in whose currency the bond is dominated. From thearticle, the power of currency in terms of the exchange rate can beused in determining whether to consider Eurobonds or foreign bonds.
Eisen,Ben. BuyingDollars Gets Pricey: A rising price for dollars borrowed overseasunderscores the crosscurrents roiling trading.The Wall Street Journal, 2016. Print.