Detrixhe and Meakin wrote an article on the fall of euro within a period of two months due to fears that Greece is unlikely to obtain bailout funds. The unlikelihood of Greece obtaining bailout funds is a clear indication that the nation’s future within the European monetary bloc is at stake.
According to the article, Detrixhe and Meakin confirm that Greece is one of the 16 nations that share the euro. On a different perspective, the dollar index rose amidst political stability that has been seen within U.S. especially during the electioneering period.
Greece’s economic and political instability are regarded as the motives behind the falling of the euro whereas the American dollar is gaining grounds on the basis that the winner of the presidential election between Barack Obama and Mitt Romney will continue with the objective of reducing deficits.
According to the article, Detrixhe and Meakin are very clear on the effect of economical stability on foreign exchange rates. Foreign exchange rates are likely to favor economically stable nations. One of the economical factors affecting the rates of foreign exchange is current-account deficit.
The balance of current account is referred to as the difference between a nation’s trading activities and the activities of trading partners. In this article, Detrixhe and Meakin clearly outline in their discussion that there is a great deficit within Greece’s and Spain’s current accounts.
Such deficits portray a bad image on the economical outlook or performance of a nation hence affecting its (nation in question, Greece and Spain) foreign exchange. Since Greece uses the euro, the exchange rate significantly drops due to bad image on economic performance. Detrixhe and Meakin further note that the dollar index rose amidst expectations that the winner of the Presidential elections would press forward plans to curtail nation’s deficit.
Economic growth expectation is another economical factor that affects the rates of foreign exchange. When there are expectations that a nation’s economy is likely to grow, it will attract investors hence causing the foreign exchange rate to rise. On the other hand, when a nation’s economic is expected to perform poorly then investors withdraw causing the foreign exchange rate to fall significantly. Greece and Spain do not have expectations of economic growth (Detrixhe and Meakin).
Economic growth and developments provide favorable environment for investments. As a result, investors are pulling out from these two countries thus affecting the euro. Since euro is shared amongst 16 economies, the rest are also affected. Moreover, Detrixhe and Meakin point out that the dollar index rose amidst expectations of economic revival.
Public debt of a nation also affects foreign exchange rates. A nation with higher public debt is likely to experience a fall in foreign exchange rate. In this scenario, Detrixhe and Meakin discuss that Greece is unlikely to obtain bailout funds. The fact that Greece is looking for bailout funds is a clear indication of the magnitude of the public debt the nation has in comparison to other nations.
With such magnitude of public debt very few investors if any would wish to invest and this affects significantly the exchange rates. Increases in public debt within Greece have prevented the nation from achieving its economic growth and development hence providing unfavorable environment for investors. Investment environments that are unfavorable push investors and consequently foreign exchange. In such cases therefore, the foreign exchange rate is likely to decline.
The last economic factor that affects foreign exchange rate as discussed by Detrixhe and Meakin is employment outlook. One of the reasons given by Detrixhe and Meakin for the rise in dollar index is the expectations that the winner of the Presidential election will work towards reviving the economy.
Employment levels within economies have immediate effect on the economic growth and development of such nations. Improving employment levels would therefore mean that a nation or economy is laying foundation for economic growth and development. Economic growth and development have the capacity of attracting investors.
As investors are attracted, more foreign currencies are earned by the economy in question and consequently impacting positively on the rates. Based on this fact, the dollar index rose amidst expectations that the winner of the Presidential elections would take charge and carry out reforms, which enhance employment levels.
Detrixhe and Meakin also discussed to a greater extent the impact of politics on foreign exchange rates. There is no doubt that a foreign investor would seek to invest in politically stable economies. Therefore, political stability provides favorable business environments for foreign investors.
Increased foreign investors will therefore bring in foreign currency thus making the nation’s currency rate to rise. Consequently, political stability causes a rise in foreign exchange rates whereas political instability causes a decline in the foreign exchange rates. Greece faces political instability. According to Detrixhe and Meakin, Samaras claim that there are talks between New Democracy Party with coalition partners in order to solve economical and political problems.
On the other hand, America is experiencing political stability with hope that the newly elected president will help in economic growth and development. Based on these two scenarios, euro index is falling whereas the dollar index is rising due to political instability and stability respectively within the two nations.
In conclusion, there are many factors that affect foreign exchange rates. Public debt, current account deficit, employment outlook, expectations of economic growth and development, and political stability are some of the factors responsible for changes in foreign exchange rates. Greece and Spain are economies adversely affected by these factors. The only way of making sure that euro stabilizes is through enacting reforms that revolve around these factors.
Works Cited
Detrixhe, John and Lucy Meakin. Euro touches month low on concern Greece won’t secure aid. 2012. Web.