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Strategies & Market Trends : Currencies and the Global Capital Markets

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To: Frodo Baxter who wrote (606)	9/8/1998 10:02:00 AM
From: Robert Douglas	Read Replies (2) of 3536

Lawrence, you asked. You're not suggesting the ONLY thing that affects exchange rates is inflation are you? On no, never. I am not even talking about cause and effect, what I am talking about is purely definitional. Inflation is the change in a price index that measures the INTERNAL purchasing power of a currency. Exchange rates between currencies measure the EXTERNAL purchasing power of a currency. If you say that the dollar/yen rate in 1985 was the appropriate one, then the way to determine what is the appropriate one today is to compare the losses or gains in purchasing power during the intervening period. Comparing rates of growth, as you suggested, does nothing to determine the value of a currency. If this were so, then those countries with the highest rates of growth the last five years (China, Malaysia, Indonesia etc.) would have had the strongest currencies. Clearly, this is not so. On the other hand countries with high RELATIVE inflation rates, with few exceptions, experience depreciating currencies. -Robert

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