Finance - Robert Hamill

Forces Affecting Exchange Rates
using Japanese example

Investment
   Interest Rate in US > Interest Rate in Japan => Japanese investors will want US bonds
   Sell yen; buy dollars. Later want to turn dollars back into yen.
   Need to guess future exchange rate, for evaluating investing opportunities.
Trade
   US wants Japanese made TV. Sell dollars, buy yen (through middleman)
   If demand for yen exceeds supply at exchange rate, then cost yen in $ must increase. (Dollar falls)
Central Banks
   Japan wants to keep their factories running at high rate. If the yen is cheap relative to dollars, the TVs are cheap for US and demand stays high.
   Bank of Japan sells yen buying dollars, pushing yen exchange rate down.

Facts & Observations
   US interest rates have been abnormally low, typically implying low investment demand for dollars => low dollar exchange rate and high yen exchange rate. Which leads to lower US demand for expensive Japanese TVs, causing slowdown in Japan.
   US balance of trade is negative $490 billion.
Bank of Japan has bougth $577 billion US bonds to drive down Japanese yen. China has bought $120 billion by mid 2003.
   If foreign goods and services look cheap, then the dollar is overvalued.
Next
   US interest rates are going up => more investment interest from abroad. Tending dollar to rise.
   Japan's economy is growing. They may not need to buy dollars to stimulate their economy. Causing dollar to sink.