Dollar Appreciation

The dollar's worth is determined by the amount of goods, services and foreign currency it can purchase. The value of the dollar can change significantly over time. To illustrate, according to the Vice Chair of the Federal Reserve Board, the exchange rate of the dollar against major foreign currencies declined more than 10 percent between the middle of 2010 and the spring of 2011. There are several reasons why the dollar appreciates and depreciates.

BASIC REASONS FOR DOLLAR APPRECIATION & DEPRECIATION 1. Supply and Demand:
Just as with goods and services, the principles of supply and demand apply to the appreciation and depreciation of currency values. If a country injects new currency into its economy, it increases the money supply. When there is more money circulating in an economy, there is less demand. This depreciates the value of the currency. When there is a high domestic or foreign demand for a country's currency, the currency appreciates in value.

2. Inflation and Deflation:

Inflation occurs when the general prices of goods and services in a country increase. Inflation causes the value of the dollar to depreciate, reducing purchasing power. Deflation occurs when the general prices of goods and services go down. Deflation increases the purchasing power of money and causes its value to appreciate. Deflation generally occurs at times when an economy is experiencing slow or no economic growth. During times of deflation, businesses must continually decrease the prices of their goods and services to find buyers. This results in the business's earning less revenue, making it necessary to reduce output to cut production costs. A reduction in output then leads to job lay-offs and can eventually cause business and plant closures. This results in massive unemployment and a further weakening of the economy. Economists do not consider deflation a positive economic occurrence.

Economic Outlook
If a country's economy is in a slow growth or recessionary phase, the value of their currency depreciates. The value of a country's currency also depreciates if its major economic indicators like retail sales and Gross Domestic Product, or GDP, are

declining. A high and/or rising unemployment rate can also depreciate currency value because it indicates an economic slowdown. If a country's economy is in a strong growth period, the value of their currency appreciates. Appreciation also occurs when major economic indicators like GDP and retail sales are on the rise.

3.Trade Deficits
A trade deficit occurs when the value of goods a country imports is more than the value of goods it exports. When the trade deficit of a country increases, the value of the domestic currency depreciates against the value of the currency of its trading partners. When the trade deficit of a country decreases, but the country remains in a deficit, the value of its domestic currency appreciates against the value of the currency of its trading partners. WHY DOLLAR APPRECIATING MORE THAN RUPEE. Dollar again jumps up to all-time high. Rupee depreciates further. Today 1 U.S. dollar = 55.4200842 Indian rupees. Now let's look into why dollar is appreciating heavily against rupee. Recession is less in India, then why dollar is moving up when rupee must be strong. We all know about recession and it is worse in US and better in India as compared to US, then how come dollar is appreciating with respect to Indian rupee? Rupee 50 note INR Why dollar is moving up and rupee is going down? There has been a recent fall in rupee since some days ago and a dramatic increase in dollar. It was 49.50, then 50.12, 51.10, 52.60, 53.54, 54.40 55.18 and today according to google search 1 U.S. dollar = 55.4200842 Indian rupees. Why is this happening? First Reason - Dollar is in Demand BRIC countries like India have emerging economy, so a huge percentage of investment in India is from outside the country, especially from US but due to recession in US, big institutions are collapsing and many of them are on the verge of breakdown. They are suffering huge losses in their country. They have to maintain their balance sheets and look strong on all statements, so to recover losses in their country, they are pulling out their investments from India. Due to this pulling out of investment by these big companies from India or in other terms disinvestment, demand of dollar is raising up and rupee is depreciating. There was a huge interest rate differential between India and US. Now RBI is reducing all kind of rates to increase money supply in market, so deposit rates will also move

downwards. It will reduce the rate differential between two countries and affect the fixed investment in India in a negative manner. Second reason - Collapse of International Trade If you observe in terms of international trade, commodity prices are crashing at international level. Importers are trying to accumulate dollars, as they have to pay in terms of dollars and at the end demand is increasing against the rupee. This has not happened yet due to lack of confidence in all kind of markets. Exporters have a very few orders from outside countries, so there is no matter of converting dollar into rupee thereby decreasing demand for rupee. Now 1 USD is at 55.42 INR and expected to depreciate further due to RBI instructions to exporters and banks. The major gainers due to rupee down were Indian IT companies including BPOs, call center outsourcing, medical transcription outsourcing, and Indian content writers, especially Indian Ad sense publishers who also earn in dollars. REMEDIES: There are so many reasons of depreciating rupee. 1.RBI should intervened and threatened to penalize exporters and banks from violating its instructions and should tell them to stop converting dollars into rupees in a fortnight. 2. RBI should always try to protect rupee by selling off it would help to hold rupee up to some extent from falling at a rapid pace. 3.The last resort of controlling rupee fall is issuing bonds by Reserve Bank of India. To prevent further downfall of Indian rupee, RBI is considering selling dollars directly to oil marketing firms.