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Nominal Exchange Rate


The nominal exchange rate is the number of units of the domestic currency that are needed to purchase a unit of a given foreign currency. It can also be seen as the price of an unit of foreign currency, in terms of the local currency.

If we need to give 1.35 dollars to buy one Euro, the exchange rate is 1.35 EURUSD

It's called nominal because it doesn't take the purchasing power into account. The real exchange rate take prices of goods and services into account.

The exchange rate has an influence in the real economy through various channels. It affect exports and imports, prices, capital flows and investment.

Fluctuations of the Nominal Exchange Rate

The nominal exchange rate is a price. It's determined by supply and demand.

Imports and Exports

When a company imports goods from another country, it's purchasing foreign currency. When a local company exports goods or services to another country, usually it sells the earnings to pay salaries and other expenses in the local country. Imports increase the demand for foreign currency, while exports increase the supply of foreign currency.

Capital Markets

When investors decide to purchase stocks, bonds or other financial instruments, they can not only buy local assets, but also foreign assets. When investors buy foreign assets, they are demanding foreign currency. When foreing investors buy local assets, or when local investors bring their money back, they are demanding local currency.

Capital markets play an important role in the exchange rate. Interest rates differentials can be an important factor in the determination of the nominal exchange rate.

Central Banks

Central Banks can play an important role in the nominal exchange rate. Big countries like China, and smaller countries like Argentina, have central banks that intervene directly in the forex market, puchasing and selling foreign exchange . But the European Central Bank and the Federal Reserve also play an important role, by periodically adjunting the interest rate of government bonds.

Nominal Effective Exchange Rate (NEER)


The exchange rate can be calculated using only two countries or using more than two countries. When only two countries are used for the calculation of the nominal exchange rate, it's called “bilateral”. When multiple countries are used for the calculation, it's called multilateral.

The nominal effective exchange rate (NEER) takes multiple countries into account. Each country can be weighted by the volume of it's trade.

For example, the European Central Bank (ECB) uses 19 bilateral euro exchange rates to calculate the Nominal Effective Exchage Rate of the euro. It choses 19 trading partners of the EU. Countries with more trade whith the EU have more weight: China, United States and United Kingdom are the most important trading partners.

http://www.ecb.europa.eu/stats/balance_of_payments_and_external/eer/html/index.en.html

The Nominal Effective Exchange Rate (NEER), together with the Real Effective Exchange Rate (REER), are commonly used as indicators of external competitiveness.

The Nominal Exchange Rate vs the Real Exchange Rate

The nominal exchange rate measure relative prices of currencies, while the real exchange rate measure relative prices of goods between countries.

The real exchange rate is the price of foreign goods, expressed in local goods. Mathematically, it's the foreign price index times the nominal exchange rate, divided the local price index:

Real Exchange Rate = EP*/P

Where:

E: nominal exchange rate
P*: foreign price index
P: local price index

Nominal Exchange Rate


Table

Domestic Currency per U.S. Dollar, End of Period
Country 199719981999200020012002200320042005200620072008200920102011201220132014201520162017
Mexico 8.089.879.519.579.1410.3111.2411.2610.7810.8810.8713.5413.0612.3613.9913.0113.0814.7217.2120.7319.79
United Kingdom 0.60.60.620.670.690.620.560.520.580.510.50.690.620.640.650.630.610.640.670.810.74
Brazil 1.121.211.791.952.323.532.892.652.342.141.772.341.741.691.862.052.352.663.93.263.31
China 8.288.288.288.288.288.288.288.288.077.817.36.836.836.626.36.296.16.126.496.956.51
India 39.2842.4843.4946.7548.1848.0345.6143.5945.0744.2539.4248.4646.6844.8153.2654.7861.963.3366.3367.9563.93
Japan 129.95115.6102.2114.9131.8119.9107.1104.12117.97118.9511490.7592.0681.4577.7286.55105.3120.64120.5116.8112.9
Canada 1.431.531.441.51.591.581.291.21.161.170.991.221.0511.0211.061.161.381.341.26

Source: International Monetary Fund

Nominal Exchange Rate Chart - Per Country

Domestic Currency per USD

Source: International Monetary Fund

Comparison Chart - Nominal Exchange Rate

Index: 2010=1 - Domestic Currency per USD

Source: International Monetary Fund

Mexico
Great Britain
Brazil
China
India
Japan

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en/nominal-exchange-rate.txt · Last modified: 2018/07/05 09:02 by federico