what makes the dollar strong or week and how dose that go against the Yen?
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Tagged with: Suppose the G8 Nations decide that the dollar is too strong (high in value) relative to the yen These nations might
Filed under: Currencies
Economic conditions will make a currency strong or weak. The situation inside the country as well as globally will affect a currency. If a currency get weaker, or goes down, the contrasting currencies will increase in relation. If the US dollar falls, the yen will rise in relation. This will make imports from Japan cost more, but exports from the US to Japan cost less in that country.
I think it is first helpful to think about why a county would/wouldn’t want a strong currency.
The foreign exchange market (a huge market where people are constantly buying/selling currencies) is simply driven by supply and demand. If there are lots of people selling the US dollar on a given day and not many people buying it, the US dollar will get weaker b/c there are not enough sellers. Alternatively, if there are lots of people buying US dollars and not many people selling US dollar on the FX (foreign exchange market) this will cause the dollar to strengthen.
Countries think about exports. For example, Japan wants to export Toyota’s to the European market. The US wants to export GMs to the European market. If we are sitting in Europe, how do we decide which one to buy. Aside from brand/make/model we will definitely look at the price. When a Japanese car is shipped to EU the car is sold in Euros. Similarly, when a US car is shipped to EU, it is also in US dollars. If the US dollar is strong relative to the Japanese Yen, the American car will seem more expensive to the Europeans. Alternatively, if the US dollar is weak relative to the Yen, the US car will seem cheaper to the Europeans.
The Japanese Central Bank wants to keep exports up. These means that they need to make sure the Yen is at a certain rate relative to the US dollar. If the Japanese Central Bank feels the Japanese Yen is too strong (making their exported car more expensive), they will go into the international FX market and sell Yen and buy US dollars. Think about what is happening here. They are creating supply for Yen. Assuming the demand for Yen stays constant and supply increases, the relative strength of the Yen will fall making the Japanese car cheaper. As the Japanese Central Bank sells Yen, they are also buying US dollars. When they buy US dollars they are creating more demand for US dollars on the international FX market. Again, assuming the supply of US dollars stays constant, as the demand for US dollars increases, this will increase the relative strength of the US dollar. If done properly, the Japanese Central Bank will be success in weakening the Yen relative to the US dollar so the Japanese exports (cars, electronics, whatever) will seem cheaper to the International market than similar goods exported from the US.
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