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Created: Jan 03, 2007
Updated: Jun 06, 2007
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All Areas of Focus » Globalization »

Currency Exchange

Definition:

Currency exchanges take place whenever someone wants to buy a foreign good or service. For example, a Japanese firm who wants to buy U.S. lumber must first convert their Yen into U.S. dollars before the transaction can take place. Since floating exchange rates change over time, the firm will buy more lumber when the Yen is stronger compared to the U.S. dollar. The strength of a currency is dependent on many factors, including the rate of growth for the country's economy, target interest rates, and stability of government. Currency exchanges play a big role in developing countries, for a weakened currency will raise the price of all imported goods (including many foods and fuels). Moreover, currency fluctuations change the level of international debt owed by a country, as most IMF and World Bank loans are to be repaid in U.S. dollars. In order to encourage Sustainable Development, some countries fix their exchange rate to a larger currency (US$ or Euro) in an attempt to limit volatility. Unfortunately, this can sometimes create a bubble of underpricing that, when popped, can trigger huge market corrections and inflation. Alternative currencies such as Local Economic Trading Systems (LETS) and TimeHOURS ensure that money is kept within a local economy because it cannot be exchanged.
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Featured Resources

Local Economic Trading Systems advocates a A LETSystem, which is a trading network supported by its own internal currency. It is self-regulating and allows its users to manage and issue their own 'money supply' within the boundaries of the network.

How Structural Adjustment Destroys the Environment discusses how when meeting the IMF's ambitious targets for currency reserves and trade balance, countries must quickly generate foreign exchange, often turning to their natural resource base

Featured Organizations

Partneri Shqiptar ne Mikrokredi's mission is to provide credit and financial services to the poor and unbankable entrepreneurs in Albania.

Did You Know?

The majority view on carefully calibrated exchange rates is that they aren't worth the cost for most countries – because they can require painful actions in the domestic economy, such as raising interest rates when recession looms, to attract investors and keep the currency within bounds.

Quote

"The floating exchange rate system is the worst possible system, except for all others."

Winston Churchill

Related WiserEarth Portals

Fair Trade
Globalization Impacts
International Debt
Trade Balance
Transnational Corporations

Tags/Keywords

Currency, exchange rate, poverty, inflation, cash economy, savings, inflation, exchange control, exchange stabilization fund (U.S.), capital flight, International Monetary Fund, IMF, Latin American Monetary Union, Scandinavian Monetary Union, Tripartite Currency Agreement, euro