Currency Volatility

The valuation of currency with respect to other currencies has a monetary as well as psychological effect on the community of investors, borrowers and consumers. A continued depreciation over a prolonged period of time  starts hurting even the exporters who are usually the only ones celebrating the downward trend. Such a situation puts all eyes on the Central Bank which is considered  the competent authority to manage the situation. Then the corrective cycle commences with a series of measures including the  raising of duties to reduce imports of high value goods, reducing liquidity in the market, raising the interest rates & so on....

It is possible to manage the short term fluctuations  through these interventions. However, if the problem is deep rooted, then fundamental issues have to be introspected. The exchange rate concept came into existence to facilitate the monetization of international trade. If trade is suffering , so shall be the fate of the currency. If trade has to flourish, it has to be be supported by a comparative advatange of the nation based on specialization /efficiency/promotion by the State/pioneering advantage/geographical clustering/ innovation.
Countries are counting on manufacturing exports, knowledge based project exports to revive their economy & currency. The role of inward foreign direct investment for establishing trade operations in host economies also has a great impact on the currency value.

Besides this, the other major contributor to fall in the value is inflation. The industrial production has to be strengthened so that the availability is ensured at the right time & the right place. It is difficult to put restrictions on consumer demand in democratic nations, but attractive investment options need to be advocated to the customer.

Governments may also create a crisis situation for the currency by borrowing to manage fiscal debt. This leads to downgrading of sovereign credit ratings not helping the currency valuations at all. The State has to prove capable of managing industry cycles, political & civil unrest and any other issue that bothers the market before the currency value falls.

Since most nations have adopted managed float as the exchange rate regime, the central bank & the State have to take sometimes hard measures to ensure stability. The management of the euro vis-a-vis dollar during the collapse of central banks of nations is really noteworthy. What remains to be seen is how industrial activity can be mobilized to control inflation and increase forex earnings to continue to keep the euro stable over a long period of time.