Financial Globalization and Exchange Rates

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Financial Globalization and Exchange Rates are the two components which are discussed at length amongst all economic experts and analysts since long time back. There have been many scholars who dedicated their entire research to explain the inter-relation between the two and how the inter-play between these phenomena affects any financial structure of the nation.

It has been noticed in the last decades that the global economy has been much influenced by a considerable increase in trans-border asset trade. A combination of trade liberalization, capital flow, decreasing transaction expenses and a positive development in financial sophistication has worked out well for the investors, who gradually were encouraged by the trend to enhance the allocation of foreign assets in their kitty. With an increase in the international financial trade, the nations that adopted expanded economic outlook experienced that their external assets and liability holdings grew more than Gross Domestic Product (GDP).

These and many such insights prompted analysts to delve deep into the topic and explore a link between Financial Globalization and Exchange Rates. However, before going directly into that aspect, let us first get acquainted with these two elements separately in brief.

About Financial Globalization

In definite terms, financial globalization signifies relation between domestic economic system of a particular nation and foreign bodies along with financial markets. A massive improvement in global economy and technology, specifically in the fields of transport and communications, led to the beginning of financial globalization. IMF and World Bank, in this regard, are the two international finance bodies that support world trade to continue the trend of financial globalization.

About Exchange Rates

Exchange rates between two currencies depict the value of one currency against the other, for example – what will be the value of international currency when measured in terms of the currency of one’s own nation.

Relation between Financial Globalization and Exchange Rates

Financial globalization and exchange rates play an important role in improving the economic outlook of any nation, which can be showed in the following manner:

  • If the net foreign assets of any nation are in the positive, the actual exchange rates of that nation will show appreciation. However, under huge external liabilities, the nation’s exchange rates are likely to depreciate more.

  • Financial consolidation helps nations to manage extensive creditor and debtor portfolios. Countries with increasing external assets or liabilities may manage trade surpluses or deficits and thereby obtain appreciation or depreciation in exchange rates.

  • Globalization of finances is useful in solving transfer problems. It removed confinements from current and capital account and brought forth equity financing that minimized transfer effect imports, generally induced by debt financing.
It cannot be denied that financial globalization and exchange rates have enhanced the economic system in the international arena to a considerable extent and have made accessibility process easy and smooth.

Last Updated on 5/18/2011