Foreign Exchange South Africa the Currency in Essay

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Foreign Exchange

South Africa

The currency in South Africa is the rand. The rand is a free floating currency meaning that there are few controls on the value of the currency. While the rand is a reference currency in the southern Africa region, it is not considered to be a "hard" currency. The performance of the rand against the USD in the past year is as follows:

The chart shows the downward trajectory of the rand against the dollar. A year ago, the rand traded at 7.73 to the dollar, and today it is 9.12, a decline of 18%. This bodes well for a manufacturing operation in South Africa, where the already-low labor costs would be decreasing over time. It does not bode well for selling in South Africa, however, as the country's currency continues to get weaker, which means profits from South Africa will be worth less in dollar terms.

The trend is fairly clear. The underlying fundamentals of the rand continue to be weak. There remains doubt about the Zuma government's ability to deal with corruption, which along with crime and poverty remains an obstacle to growth. Given that there does not appear to be much opportunity for change in South Africa, the trend is likely to continue.

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The rand should deteriorate a further 10% against the dollar this year, which is higher than the expected rate of inflation, which means that the rand will depreciate in real terms. The exchange rate with a 10% decline would be around 10 rand to the dollar.

Japan

The Japanese yen is considered to be a reserve currency. This means that not only does it float freely, but that it is also widely traded and widely held by central banks as a store of value. The market for the JPY/USD pairing is very liquid. The trend line for the yen for the past year is as follows:

This shows the yen had a stable stretch, but has been on a decline since around the end of September. The yen was at 81.03 a year ago, but is at 98.84 today. The yen therefore has depreciated 21.9% against the dollar in the past year. This trend might well continue. While Japan has a strong economy, its economy lacks growth. Japan has also been experiencing deflation, so in real terms the yen has become even weaker against the dollar than….....

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