The relationship of currency floatation to forex

The idea of ​​investing in currencies appeared i conjunction with the beginning of the emergence of the principle of flotation in order to take advantage of currency differences.

Where actual investment in currencies began since the eighties of the last century, which was limited to businessmen and central banks only.

Interbank Mechanism:

It is a mechanism used to determine the exchange rate of the currency, through which banks are obligated to announce the purchase and sale prices of currencies in exchange and directly.

No bank shall have the possibility to refuse such order as long as it is subject to this Agreement.

This agreement is characterized by clarity and the ability to control the exchange rate according to the ratio of supply and demand, without being affected by exchange companies or the black market.

In addition to preventing this mechanism for the practice of speculation in the currency price with the aim of profit, where the order of determining the price is limited to the strength of supply and the strength of demand without any continuous increase or decrease.

The effects of the currency float on the economy of countries

Floating the currency affects the value of the domestic currency, whether it rises or falls, which affects prices, foreign trade and economic growth in general.

Where these effects differ depending on the situation of the country using the currency float system.

Its impact on advanced industrial countries differs from that of developing countries.

In the event that the currency floats in the direction of a rise in its exchange rate:

If the floating of a currency causes the exchange rate of this currency to rise against other currencies, meaning a rise in its parity rate with foreign currencies, this would have had a negative impact on the movement of exports, due to the rise in prices for foreign importers, which in turn leads to a decrease in demand.

This results in an increase in imports as a result of lower commodity prices for local importers, and consequently, a trade balance deficit occurs.

Which may lead to motivating local capital to turn to foreign investment due to the availability of the opportunity to replace the local currency unit with a larger number of foreign currency units, which would have a negative impact on the state's payments.

The local industry is also affected as a result of its entry into a competitive field with imports, which increases with the relative decline of foreign goods for local importers, which in turn causes a slowdown in economic growth and a decline in the production process.

The decline in the production process leads to an increase in unemployment, which upsets the trade balance.

In the event that the currency floats in the direction of a decrease in its exchange rate:

Floating the currency towards a decrease in its exchange rate, or the so-called depreciation of its equivalent price, leads to the opposite of the aforementioned economic effects of raising the price of the currency.

However, it differs in the advanced industrialized countries than in the developing countries, and this is due to a number of reasons

one of the importants:

International demand for exports from developing countries is often highly elastic.

While its production process is relatively weak, which hinders it from meeting external demand, if it exists at all.

Consequently, it resorts to completing most of its foreign transactions using the currencies of its most important trading partners, without using its local currency, which in turn works to limit the movement of the local currency significantly.


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