Global Financing and Exchange Rate Mechanisms Veronica L. Powell University of Phoenix MGT/448 Donald Joseph March 31, 2009 Global Financing and Exchange Rate Mechanisms Currency is unreliable. In some countries the United States dollar is worth more than that countries currency, while in other countries the U. S. dollar is worth less. The exchange rate fluctuates on a continuous base which makes the term “funny money” more realistic each day. The purpose of this paper is to discuss hard and soft currency, the South African rand, Cuban pesos, and why the exchange rates fluctuate.
Hard currency is a currency, usually from a highly industrialized country, that is largely accepted globally as a form of payment for goods and services (Investopedia, 2010). Hard currency is presumed to remain fairly stable through a short period of time, and to be considerably liquid in foreign exchange markets. Soft currency is another name for “weak currency. ” The values of soft currencies fluctuate often, and other countries do not want to hold these currencies due to political or economic uncertainty within the country with the soft currency (Investopedia, 2010).
Hard currency comes from a country that is politically and economically stable. The United States dollar and the British pound are examples of hard currencies. Soft currencies tend to be prevalent in developing countries. Often, governments from developing countries set unreasonably high exchange rates, pegging the currency of that country to a currency such as the United States dollar. South Africa had a fixed exchange rate for its currency until the latter part of the 1960s; afterward, the South African rand was pegged against major foreign currency.
The value of the rand followed changes in the balance of payments and moved roughly with sterling and other weaker currencies until 1985 (Country Data, 1996). The foreign debt crisis of 1985 prompted the rand to depreciate at a bewildering rate, thus it fell to a value that was less than US$0. 40. In 1987 the rand began to recover reaching US$0. 43; however the rand continued to decrease steadily, with minor differences, until declining to US$0. 26 in the latter part of 1995. The rand is a parallel currency that was exclusively used for nonresident capital movements during the 1980s and 1990s.
The financial rand was available to foreigners for investment only in South Africa was formulated by the sale of nonresidents’ assets in the country (Country Data, 1996). The two-tiered currency system insulated the country’s foreign reserves from politically stimulated capital flight, because all divestment by nonresidents were automatically met by new investment, and the price of the financial rand varied independently of the commercial rand (Country Data, 1996). Ultimately, South Africa’s economic growth depends upon increasing gold profits and foreign investments.
The Cuban Pesos (CUP) is the official currency in Cuba. The American dollar is not accepted on government business in Cuba since November 2004. All of the stores that sold goods in American currency changed to the Cuban Convertible Pesos (CUC). Pesos convertibles cost the equivalent of $1. 18 United States Dollars (USD). In Cuba, currency is exchanged every day, and it is a known fact that the pesos are unstable. The Cuban Pesos is equivalent to 100 cents (centavos). The notes can be of the following denominations: 1, 3, 5, 10, 20, 50, and 100 pesos; coins can be of 1, 5, and 20 centavos (Cuba Currency, 2005).
The exchange to the Pesos convertible into United States Dollars are fixed, one to one equivalent of the $1 USD that was established by the Central Bank of Cuba. National currencies are important to the way modern day economies function. The national currencies allow businesses to logically express the value of a good, service, or product globally. Exchange rates are needed because one countries currency is not always accepted in another country. An exchange rate is simply the cost of one form of currency in another form of currency (Grabianowski, 2004).
For example, if 1 South African rand is exchanged for 80 Japanese yen, the consumer purchased a different form of currency to use in while in Japan. Many centuries ago, currencies of the world were covered by gold. A piece of paper currency was issued by any world government agency that represented a real amount of gold being held in a vault by that government agency (Grabianowski, 2004). In the 1930s, the U. S. set the value of the dollar at a single, unchanging level: 1 ounce of gold was worth $35 (Grabianowski, 2004). Other countries based the value of their currencies on the U.
S. dollar after World War II. Since everyone knew how much gold a U. S. dollar was worth, then the value of any other currency against the dollar could be based on its value in gold (Grabianowski, 2004). Currency worth twice as much gold as the U. S dollar was, subsequently, also worth two U. S. dollars (Grabianowski, 2004). The two main systems used to determine a currency’s exchange rate are: floating currency and pegged currency. The market determines a floating exchange rate. For instance, a currency is worth whatever buyers are willing to pay for it.
This is determined by supply and demand, which is in turn driven by foreign investment, import/export ratios, inflation, and a host of other economic factors (Grabianowski, 2004). Primarily, countries with stable and mature economic markets use a floating system. Floating exchange rates are considered efficient because the market will automatically correct the rate to reflect inflation and other economic forces (Grabianowski, 2004). The floating system is not perfect, if a country’ economy suffers from instability; a floating system will discourage investment (Grabianowski, 2004).
To sum up, this paper discussed hard and soft currency, the South African rand, Cuban pesos, and why the exchange rates fluctuate. Hard and soft currencies are both affected by the exchange rate which fluctuates on a daily basis. Though the notion of the USD not being accepted in Cuba seems unreasonable, it is the choice of Fidel Castro and is honored by American citizens. As countries continue to develop more currencies will become available and will also have the affects of the fluctuating exchange rate. References Country Data. (1996, May).
South africa currency. Retrieved from http://www. country-data. com/cgi-bin/query/r-12162. html Cuba Currency. (2005). Cuban pesos. Retrieved from http://www. cubacurrency. com Grabianowski, E. (2004, February 06). How Exchange rates work. Retrieved from http://money. howstuffworks. com/exchange-rate. htm Investopedia. (2010). What does Soft currency mean? Retrieved from http://www. investopedia. com/terms/s/softcurrency. asp Investopedia. (2010). What does Hard currency mean?. Retrieved from http://www. investopedia. com/terms/h/hardcurrency. asp