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Thursday, July 4, 2019

4 Reasons Why Dollar Raises To Currency?

4 Reasons Why Dollar Raises To Currency?

(Pakistan | India | China | U.S | All)

Most of the times when we switch to any news channel we always hear dollar gains against rupee. Well, its a matter of long discussion that why a currency gets value in comparison to another one or why a currency devalues/depreciates to another. 

Here I will explain 4 possible reasons why currencies fluctuate.

1) Balance of Payments:

4 Reasons why Dollar raises to any currency | Balance of Payments
Pic Source: https://fee.org/articles/negative-balance-of-trade-so-what/

                                                     
Its belongs to the balance between imports and exports. Basically, the trades mostly took place in dollars (as per an intl agreement). Countries produce goods and services and then sell them to other countries moreover they purchase goods and services from other countries at the same time as well (those goods which they cant produce or if-then at a higher cost). 

When the products they sold values more than the products they purchase then it is called a Trade Surplus. Usually, the country's currency gets value in this case. Moreover in the other one, if imports exceed exports its called a Trade deficit.

In the case of Pakistan throughout the history of 72 Years there's not a single year when this trade was in surplus whereas the highest trade deficit has been observed during the tenure of PMLN-PTI i.e 2018, of about $30.363 Billion. Means in 2018 country sold the goods of -$30Billion to what it purchased.

2)Money Laundering:

4 Reasons why Dollar raises to any currency | Money Laundering
Pic Source: http://www.gdrc.org/icm/hawala.html

Another possible reason is when the dollars within a country itself been laundered abroad. It is also known as “Dirty Money”.  There are many types of techniques humans used to launder their money. 


The use of Hundi & Hawala is also one of the types of Money Laundering. Where the dollars are sent abroad without any documentation just for the sake of saving the cost of taxes, not been documented, whiten the black money and much more.

 
If Hundi & Hawala has strong roots in a country then many global institutions also don’t invest in that country. i.e PayPal is a financial institution deals with the online exchange and the transfer of money hasn’t opened the doors to its office in Pakistan. Reason: Money Laundering. 
Usually, its a task of govt officeholders to end these Mafias and encourage the public to transfer money using Banking Channel. Moreover “Financial Action Task Force (FATF)” is especially established in 1989 for the purpose to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.
However, FATF ranked Pakistan in its Grey List with serious allegations on 29 June 2018.

3) Central Bank:


4 Reasons why Dollar raises to any currency | Central Bank
Pic Source: https://www.advisor.ca/advisor-to-client/investing/central-banks-and-why-they-exist/

What if a country itself devalues its currency for some personal benefits?
In this World many countries themselves devalue their own currency in order to increase its exports i.e when a country’s products become cheaper in international markets, the international buyers will go for that product in comparison to other expensive products. 

But it's important for a central bank to look all possible resulting effects of that devaluation before making it happen.

In the case of Pakistan the country did this job various times and without understanding its effects which resulted in not positive gains all the times. However some of successful countries in getting positive results from devaluation are China, Japan, Korea


4) Foreign Reserves:

4 Reasons why Dollar raises to any currency | Foreign Reserves
Pic Source: https://www.wsj.com/articles/why-central-banks-are-stockpiling-foreign-reserves-1488914148

A country usually keeps the dollar reserves in its central bank as well as commercial banks. Which is utilized in the time of necessity been in order to maintain the supply go smoother.

Usually, it has been seen a country’s currency value fluctuates when its reserves of another currency decline. Reason: Demand-Supply rule. In the case of Pakistan, it has approximately $15 Billion only. Whereas its ill-wisher India has foreign reserves of a whopping $420 Billion.

These are four possible reasons which would be responsible for any currency to rise or fall in trading markets.

Also, Read US Dollar Impact on Your Life?

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