CHAPTER SEVEN
Understanding Exchange Rates

For anyone engaged in cross-border transactions, grappling with exchange rates is a necessary fact of life. Although no one can predict with great confidence how a currency will move over a given time period—whether it will appreciate or depreciate, let alone by how much—we can identify key factors that are likely to influence exchange-rate movements, over both the short term and the long term. This chapter offers a brief overview of the most important factors, why they matter, and how they interact.

The Current Account Balance

A country's trade balance—or, more precisely, its current account balance—is ...

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