Exchange Rates and Agricultural Trade Chapter 17.

Exchange Rates and

Agricultural Trade

Chapter 17

Discussion Topics

Exchange rates and the foreign exchange market

Exchange rate determinationExchange rates and U.S. agricultural

trade

Exchange Rate DefinedExchange rate: The no. of units of foreign

currency (i.e., Mexican peso) required to obtain 1 unit of domestic currency (i.e. U.S. $)

Reciprocal of this rate: No. of units of domestic currency required to obtain 1 unit of foreign currencyValue of domestic currency relative to foreign

currency (i.e., value of the $ relative to the £ or ¥)

35

When the value of the dollar appreciates in value, the exchange rate index increases

A depreciation of the value of a dollar causes the index to decline

Exchange Rate Defined

Canadian dollar (per U.S. dollar) of 1.305 → 1.31 Canadian dollar exchanges for 1 U.S. dollar

British Pound (in U.S. dollars) of 1.82 → a British pound exchanges for almost $1.82 in U.S. currency

Only 25 countries, including the U.S., Japan and Canada allow their currencies to float independentlyDetermined by supply and demand for

these currencies

Most countries peg or “fix” their currency relative to another currency or basket of currencies

Exchange Rate Determination

Exchange Rate DeterminationE

xch

ange

Rat

e

Demand for U.S. $ Supply of U.S. $

Foreign demand for U.S. $ neg. slopedLower exchange rate → cheaper

for EU to import U.S. goods/services

↑ demand for U.S. $ to pay for imports

Supply of U.S. $ positively slopedHigher exchange rate →

Imports to U.S. relatively cheapConvert $ to foreign currency,

more $ available to market

Eu

ros/

$

1

2

3

4

5

2010 4030 50

Quantity of $ Traded(Mil./Day)

ScenarioU.S. Wheat

Price($/ton)

Exchange Rate

(Yen/$)

International Wheat Price

(Yen/ton)

Base 100 120 12,000

Case 1 110 120 13,200

Case 2 100 132 13,200

An increase in the value of the dollar (relative to the Yen) makes U.S. exports more expensive

Exchange Rate Impacts


Interest rate differentials across countries are a major factor affecting demand for currency

↑ in U.S. interest rates relative to other countriesForeign investors would transfer funds to

the U.S. to generate higher returns → ↑ in demand for U.S. $


Exc

han

ge R

ate

U.S. $ Demand

Supply of U.S. $

Eu

ros/

$

1.1

1.2

1.3

1.4

1.5

2010 4030 50


An ↑ in demand for U.S. $ as U.S. interest rates ↑Exchange rate goes from 1.30 to 1.433 Euros/$

U.S. $ Demand w/ ↑ in IR


Balance of Trade has an impact on exchange rates

U.S. trade deficit (U.S. imports > U.S. exports) → exchange rate ↓U.S. exports become relatively cheap for

other countriesU.S. imports of other countries goods

become more expensiveU.S. exports will ↑ & U.S. imports will ↓→Approach balanced trade levels


Exc

han

ge R

ate

U.S. $ Demand

Supply of U.S. $

Eu

ros/

$

1

2

3

4

5

2010 4030 50


Supply of U.S. $ resulting from trade deficit

Trade deficit → an ↑ in supply of U.S. $ on currency markets→ weakening of the U.S. $→↓ in exchange rate from 3 to 2 Euros/$

Exchange rate ↑→ exports tend to ↓Exchange rate ↓→ exports tend to ↑

SummaryExchange rates have an impact on U.S.

agricultural trade

The value of foreign currencies is determined in the foreign exchange market.

Exchange rates have a significant impact on our trade balance

Chapter 18 discusses the reasons why nations trade….

Exchange Rates and Agricultural Trade Chapter 17.

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Transcript of Exchange Rates and Agricultural Trade Chapter 17.