Exchange
Rates and
Agricultural
Trade
Chapter 17
Discussion Topics
 Exchange rates and the foreign exchange
market
 Exchange rate determination
 Exchange rates and U.S. agricultural
trade
Exchange Rate Defined
Exchange rate:
The no. of units of foreign
currency (i.e., Mexican peso) required to
obtain 1 unit of domestic currency (i.e. U.S. $)
Reciprocal of this rate:
No. of units of
domestic currency required to obtain 1 unit of
foreign currency
Value of domestic currency relative to foreign
currency (i.e., value of the $ relative to the £ or ¥)
Page 335
Exchange Rate Defined
When the value of the dollar
appreciates in value, the exchange rate
index increases
A depreciation of the value of a dollar
causes the index to decline
Page 337
 Canadian dollar (per U.S. dollar) of 1.305 → 1.31
Canadian dollar exchanges for 1 U.S. dollar
 British Pound (in U.S. dollars) of 1.82 → a British pound
exchanges for almost $1.82 in U.S. currency
Page 337
Exchange Rate Determination
 Only 25 countries, including the U.S., Japan
and Canada allow their currencies to float
independently
Determined by supply and demand for
these currencies
 Most countries peg or “fix” their currency
relative to another currency or basket of
currencies
Page 345
Exchange Rate Determination
Exchange Rate
Euros/$
Demand for U.S. $
Supply of
U.S. $
5
4
3
2
1
10
20
30
40
50
Quantity of $ Traded
(Mil./Day)
Foreign demand for U.S. $
neg. sloped
 Lower exchange rate → cheaper
for EU to import U.S.
goods/services
 ↑ demand for U.S. $ to pay for
imports
Supply of U.S. $ positively
sloped
 Higher exchange rate →
Imports to U.S. relatively cheap
 Convert $ to foreign currency,
more $ available to market
Page 348
Exchange Rate Impacts
U.S. Wheat
Price
($/ton)
100
Exchange
Rate
(Yen/$)
120
International
Wheat Price
(Yen/ton)
12,000
Case 1
110
120
13,200
Case 2
100
132
13,200
Scenario
Base
An increase in the value of the dollar (relative
to the Yen) makes U.S. exports more expensive
Page 352
Exchange Rate Determination
Interest rate differentials across
countries are a major factor affecting
demand for currency
↑ in U.S. interest rates relative to
other countries
Foreign investors would transfer funds to
the U.S. to generate higher returns → ↑
in demand for U.S. $
Page 348
Exchange Rate Determination
Supply of U.S. $
Exchange Rate
Euros/$
1.5
1.4
U.S. $ Demand w/ ↑ in IR
1.3
1.2
1.1
U.S. $ Demand
10
20
30
40
50
Quantity of $ Traded
(Mil./Day)
An ↑ in demand for U.S. $ as U.S. interest rates ↑
Exchange rate goes from 1.30 to 1.433 Euros/$
Page 348
Exchange Rate Determination
Balance of Trade has an impact on
exchange rates
U.S. trade deficit (U.S. imports > U.S.
exports) → exchange rate ↓
U.S. exports become relatively cheap for
other countries
U.S. imports of other countries goods
become more expensive
U.S. exports will ↑ & U.S. imports will ↓
→Approach balanced trade levels
Page 348
Exchange Rate Determination
Exchange Rate
Euros/$
Supply of U.S. $
Supply of U.S. $ resulting
from trade deficit
5
4
3
2
1
U.S. $ Demand
10
20
30
40
50
Quantity of $ Traded
(Mil./Day)
Trade deficit → an ↑ in supply of U.S. $ on
currency markets
→ weakening of the U.S. $
→↓ in exchange rate from 3 to 2 Euros/$
Page 348
Exchange rate ↑→ exports tend to ↓
Exchange rate ↓→ exports tend to ↑
Page 351
Summary
Exchange rates have an impact on U.S.
agricultural trade
The value of foreign currencies is
determined in the foreign exchange
market.
Exchange rates have a significant impact
on our trade balance
Chapter 18 discusses the reasons
why nations trade….