Looking into Financial Crisis through Exchange Rate
2010/04/08 4 Comments
Definition of Exchange Rate
In finance, it is a converter that can specify how much one currency is valued in terms of others. To help you understand, suppose that you plan to travel abroad. What would be the most important thing that you must bring before going wonderful shopping and having dinner at there? It’s money, their money. Now it’s easy. You have to exchange domestic currency for foreign currency in use where you travel to.
Factors that Decide Price of Foreign Currency
Above all, it would be crucial to know how exchange rates get decided. A simple and very economic explanation is that the price is depending on demand and supply. Take a look at this graph.
The intersection of the supply and demand curve for currency is the exchange rate. Suppose supply of one currency is fixed. If a lot of people want that currency, it became rarer and pricier, but if not a lot of people want that currency, it became more common and less expensive. (The same will apply when there are fixed demands with moveable supplies.)
Financial Crisis in 1997 and 2008
Since exchange rates determine prices of foreign currency, they can influence prices of Belgian chocolate, designer clothes from Italy, and a huge LCD television from Korea, and these “stable” price tags are very important economic indicator because they are suggesting that the demand and supply of currency are somehow met properly. However, there were two times when the demand and supply of dollar in Korea were not met quite properly.
As you can see the above graphs, it has two high peaks in about 1997 and 2008. The simple explanation for these peaks is this: The price of dollar became so expensive in 1997 and 2008 in Korea because there was not enough supply of dollar.
Why Dollar Got So Expensive?
At those times the whole world knew that they were facing a global financial crisis, so they tried to have dollar as much as they could because dollar was so called a safe haven currency. (Safe Haven Currency: It is favored by investors and fund managers in times of crisis because of its stability and easy liquidation.) Therefore, as many strong countries tried to have their dollar back to their countries, the dollar that had been supplying to Korea became lesser making the price of dollar so much higher.
Precaution for Possible Financial Crisis in Future
Now there are some lessons learned. Financial Services Commission has launched a special “Task Force” supported by academics, researchers, market people and the government. Though the Task Force has five specific provisions, the whole point is to keep on monitoring the global trend and then keep on improving the corporate governance structure. They will make this happen thorough careful review and revise of entire regulations and rules in whole financial sectors. Finally based on this result from the Task Force, they will try to push for the legislation of the bill to the National Assembly in around September.