Exchange Rate of the US dollar with Rupiah Currencies

Posted: November 27th, 2013

Name:

Course:

Lecturer:

Date:

Exchange Rate of the US dollar with Rupiah Currencies

Introduction

Exchange rate is the value of one country over another value of a different country. The currency rate usually differs in selling or buying of a certain currency in the market. In the United, they use the US dollar and they have their symbol that represents the dollar. The symbol is written as $ and it is divided into 100 cents. Consequently, the Indonesian Rupiah is the currency used in Indonesia. This currency is represented by a symbol written as IDR and it is divided into 100 Sen. Exchange rates between the US dollar and Rupiah currencies is determined by various factors such as inflation differentials, deficits in current accounts, public debt, trade terms or political stability. However, the Gross Domestic Products, industrial productions, retail sales and consumer price index affects the exchange rate of the US dollar with Rupiah currencies.

Discussions

Industrial production is one of the economic measures that affect the exchange rates. This may affect the currency of these countries in that the change in production of products in industries may be influenced by the currency change. The United States is well industrialized comparing to that of Indonesia, which are at the growing pace (Hurley and Rolando 33). Traders are usually concerned with production utility, which sometimes can be volatile when the utility industries and the trading demand may be affected by weather changes. Weather changes cause volatility in the currency of the nation. Thus, the most affected people will be those from poor countries or countries that are developing such as Indonesia.

Consequently, consumer price index is another indicator that measures price changes of consumer goods. When this factor is compared with the nation’s export, a country can be able to determine if it is making profits or losses fort their products or services. Careful monitoring of exports should be precisely done because the export of one country may be affected by another country’s currency. For instance, if the United States depreciates their currency, this means that Indonesia will have to appreciate or look for another method of adjusting to the exchange rates. Thus, it is advisable for a country to carry fundamental analysis of the foreign exchange market before starting trading with another country. This is because the consumer price index indirectly affects the volume of the currency and the price of commodities.

Gross domestic products, which are a measure of economic development of a given country, may affect the exchange rates between these countries. Usually this factor represents all the total market value of all commodities produced in a certain economic region and it is expressed in a year. It is considered as a lagging indicator for most countries trading or involving in the global business. The report that is given may cause a considerable instability of a certain country’s exchange rate (Turner and Reinsch 45). When comparing the Gross Domestic Products of the United States and that of Indonesia, the US has a higher GDP unlike that of Indonesia. This causes variability in the market and thus the Indonesians may experience losses hence they may not make any changes in development.

A retail sale is another factor that affects the exchange rate in the market. This factor measures the total receipts of goods and services in all the retail stores of a given country. This indicator is derived from a varied retail store samples of different countries. The information collected is used as a timely indicator of a wide consumer-spending pattern in order to adjust for seasonal variables. This can be used for predictions of other essential variables that are lagging behind (Rao 35). Therefore, the economic assessment will be followed in order to enable the country to get a better direction. Sometimes the report provided can cause a significant instability of a country’s currency. The sales can be used in comparison of the publicly traded industries and this may affect the exchange rate in the market.

High exchange rate instability creates insecurity, increases the costs of transactions and the interest rates. Moreover, it discourages the international trade and investments. The unstable medium terms are identified with substantial misalignment and this is common in the developing countries where Indonesia is among them. This is because of unrelenting real exchange instability and misalignment that are associated with unsustainable trading deficits and lower economic development at the end (Coric and Geoff 42). Therefore, currency crisis may be experienced between the two countries. Consequently, a high volatility of exchange rates may contribute to poor financial markets in the long-term.

It seems that the Indonesia Rupiah is the most volatile currency in Asia. This is after the Asian crisis, which reflects on the economic and political disturbances in the region. From the table 1 below, the largest devaluation corresponds to the share markets in the exchange market rates in the current market (Ostermiller 2011). The economists indicate that the economic and political crisis may make the country to adopt pegged or floating exchange rates system. The exchange rates may contribute to economic slowdown due to currency fluctuations. For instance, Indonesia is one of the poorer countries in Asia and it has been experiencing currency fluctuations over the common currency. Thus, keeping convertibility and a stable currency against that of US dollar can be done. However, this can be achieved through adopting stable monetary policies.

Nevertheless, the movements in exchange rates depend on the type of exchange rate systems used by the monetary authorities. For instance, the International Monetary Fund (IMF) adopts various methods in which different countries depend on exchanging their currencies. For instance, Indonesia is using floating exchange rate system in the current market with that of the United States dollar. This is linked to the degree in which the US dollar is exchanged in the market. Indonesia reacts towards the currency depreciation of the United States dollar. When focusing on movements of exchange rates, we find that there is a systematic reaction towards the US dollars. In 2002, when the United States dollar depreciated, the Indonesians had to appreciate it. Dollars is the one, which mostly affects or determines the exchange rates in the market thus, when there are changes of US dollars, some countries have to adopt pegged system, floating exchange rates or fixed exchange rates.

Consequently, inflation differentials between Indonesia and the United States are highly interrelated. Inflation is the circulation of too much money on a given country and this leads to high prices of commodities thus affecting the exchange rates. When one country has a lot of money in circulation within the economy, the exchange rates is likely to be affected. This is because there will be increased demands of commodities relative to another country. During the last half centuries, Indonesia was one of the countries recorded with low inflation rates while the United State achieved relatively low inflation rate but this really affected the exchange rates between the two countries. The countries with higher rate of inflation may experience depreciation in their currency in relation with the currency of another nation.

Interest rates may affect the exchange rates in that if the central banks exert pressure on exchange rates, the changing interest rates may affect the currency values. Furthermore, higher interest rates provide borrowers within the economy a higher relative returns than the other countries. This will contribute to inflation and this may sometimes drive the currency of another country down. This is opposite in that decreasing of interest rates may affect the exchange rate in an economy. This is because there will be little money in circulation thus the currency of one country will depreciate making the other country to appreciate their currency (Kawai and Shinji 51).

The trading terms especially the comparison between the export and import rates and the balance of payments may affect the exchange rates. The United States have their own terms of trading systems against other developing countries. For instance, increases in the price of Indonesia’s exports than the import rates means that the country has greatly improved. This will lead to increased revenues on the exported goods and this will consequently contribute to increased demand for Indonesia’s currency. However, the currency value may decrease in relation with that of US while they are transacting business in case the export rises than the imports. Indonesia has trade to Gross Domestic Products ratios terms together with trading intensity ratios, which normalizes the bilateral trade and this is higher than that of the United States (Hurley and Rolando 15). This trading term has significantly led to instability of their currency rate with that of the United States.

Conclusion

Various factors affect the exchange rates of the US dollar with Rupiah currencies. Gross Domestic Products, which are a measure of economic development of a given country, may affect the exchange rates between these countries. Consequently, consumer price index is another indicator that measures price changes of consumer goods. A retail sale is another factor that affects the exchange rate in the market. This factor measures the total receipts of goods and services in all the retail stores of a given country. In addition, high exchange rate instability creates insecurity, increases the costs of transactions and the interest rates. Interest rates may affect the exchange rates in that if the central banks exert pressure on exchange rates, the changing interest rates may affect the currency values. Lastly, the trading terms especially the comparison between the export and import rates and the balance of payments may affect the exchange rates thus making differences in the exchange rates.

USD rate                                                                 USD rate
2011-07-14                                                              2011-07-14

Table 1: Exchange rate table between Indonesia and United States

Works Cited

Coric, Bruno, and Geoff Pugh. “The Effects of Exchange Rate Variability on International

Trade: a Meta-Regression Analysis.” Applied Economics. 42.20 (2010): 2631-2644. Print.

Hurley, Dene, and Rolando Santos. “Exchange Rate Volatility and the Role of Regional

Currency Linkages: the Asean Case.” Applied Economics. 33.15 (2001): 1991-1999. Print.

Kawai, Masahiro, and Shinji Takagi. “Strategy for a Regional Exchange Rate Arrangement in

East Asia: Analysis, Review and Proposal.” Global Economic Review. 34.1 (2005): 21-64. Print.

Rao, M J. M. “On Predicting Exchange Rates.” Economic and Political Weekly. 35.5 (2000):

377-386. Print.

Ostermiller, Stephen. Indonesian Rupiahs (IDR) and United States Dollars (USD) Currency

Exchange Rate Conversion Calculator. 2011. Web. July 15, 2011 <http://coinmill.com/IDR_USD.html>

Turner, Jeanine, and Reinsch. “The Business Communicator As Presence Allocator:

Multicommunicating, Equivocality, and Status at Work.” Journal of Business Communication. 44.1 (2007): 36-58. Print.