The exchange rate affects factors reflecting the country’s economy.
- Indicators of economic growth ( gross national income, the size of industrial production )
- Trade balance’s condition, degree of dependence on external sources of natural resources.
- Domestic money market growth.
- Growth of inflation and inflationary expectations.
- Interest rate.
- The country’s solvency and confidence in the national currency on the world market.
- Speculative operations on the foreign exchange market.
- Degree of development of other sectors of the global financial market, for example securities market competing in the foreign exchange market
Money in foreign country
Interest rates differential
Types of securities:
T-bills (government securities) USA – Bonds UK – Gilts Germany – Bunds Japan – JGB
USA – negative budget deficit Japan – positive budget deficit
Japan also has its principal assets in US bonds around 60% of the market size.