Foreign Exchange Rate

The foreign exchange rate represents the number of units of one currency that exchanges for a unit of another. A currency is said to depreciate with respect to another when its value in terms of the other. For example, the dollar depreciates with respect to the yen if the -/$ exchange rate falls. The rate of depreciation is the percentage change in the value of a currency over some period of time. In the case, for example, in 1986, e-/$ = 165 but by 1987 e-/$ had dropped to 122. To calculate the percentage change, the following formula is used: (New value - Old value) / Old Value. This yields the following results:

Therefore, during the period in question the U.S. dollar depreciated relative to the Japanese Yen by 26 percent. When a currency such as the U.S. dollar depreciates, the income generating potential or profitability on exports for exporters such as Campbell Soup Company goes up. When the dollar dropped against the Yen, it made U.S. goods and services 26 percent cheaper to the Japanese. So, in a sense, a weaker dollar is good for American exporters such as Campbell.

The exchange rate between the dollar and the Yen is determined by supply and demand meaning that it floats or adjusts to the demand for and supply of U.S. dollars versus Yen. When examining why the dollar depreciated against the Yen so dramatically, economic theory suggests there are four major factors that determine the exchange rate between two curren

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Category: Economics - F