Floating Exchange Rates Reflect Current Events and Term Paper

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floating exchange rates reflect current events and future expectations; there are many reasons for such continual fluctuations. A brief examination of current events in Europe and the United States illustrates how quickly exchange rates change and what propels them to do so. The article "Euro Falls to 2-Year Low Against Dollar"(Waki, 2005), which appeared in The Moscow Times, succinctly describes the latest exchange rates of the euro and the dollar and the main reasons for these developments.

As of the early hours of November 10, 2005, the euro fell a quarter percent, currently holding at 1.1750 dollars (Waki, 2005). This is another drop in a series of recent falls; for example, it traded at $1.793 on November 7, 2005 and at $1.787 on November 8, 2005 (Read, 2005). This is an interesting situation as the euro had previously and steadily been appreciating. Naturally, a falling euro signals a stronger U.S. dollar. In fact, on November 8, 2005, 'the dollar rose to its highest level against the euro in nearly two years' (Read, 2005, 1). Some speculate that it may continue to rise depending on political, social, and monetary situations in euro-zone countries.

The value of a nation's currency is greatly determined by its political stability and policies. In the presence of political uncertainty, a country's currency is likely to depreciate. This phenomenon reflects common sense: one is naturally hesitant to invest in or conduct business with a nation whose political future is unknown.

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Simply put, in such situations the risks are too great and the vulnerabilities too numerous for an astute investor or businessman. One must not look too far for a current illustration of this principle. In fact, Germany's political uncertainty is one reason for the recent depreciation of the euro. The recent German elections spurred controversy and upheaval when then Chancellor Schroder 'refused defeat' (The Economist, 2005, 53). Merkel, promising to create a 'grand coalition', is finding the feat ever more challenging as some of her colleagues have resigned while several leaks have provoked more controversy. With setbacks occurring frequently, which are stalling the nation's political machine, it is not surprising the euro is falling.

In addition to political insecurity, social unrest greatly determines the value of a nation's currency. Again, common sense dictates that a country in the midst of social turmoil is not a prudent choice for investment and business. France is presently experiencing a protracted series of riots throughout the nation; they are due to the perceived and real marginalization of some minorities (particularly Arabs). The state's inability to effectively and efficiently quell the riots only worsens the situation. What's more, there are fears the riots may spread to neighboring countries, many of which also have significant minority populations. In fact, there is evidence to suggest this is already the situation. Cars were set on fire in Germany and Brussels, identical to the acts of violence and vandalism now taking.....

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