Israel Exchange Rate (as of February 8, 2007)

The current exchange rate for the Israel New Shekel is 1 USD = 4.22796 ILS (from http://www.xe.com).  The Israel New Shekel, which equaled 1,000 old shekels, came into circulation by the Bank of Israel in 1985 as a result of 180% inflation from the previous year.  I wish there was interesting facts about the Israeli currency, but at this point, I can’t find much.  I have explored the Bank of Israel and briefly read through the recent inflation reports, which had mentioned slow appreciations from July-October 2006 as a result of global developments and a weaking of the USD.  By the end of 2006, the CPI fell by 1.7 percent.  The thing that doesn’t make sense is that even though the CPI decreased, the report mentions that the shekel appreciated due to the increased consumer demand resulting from a decline in the world energy prices.  If the shekel is appreciating, shouldn’t prices be rising, not falling (as indicated from the CPI)?

Source: Bank of Israel Inflation Reports (2006)

Economy of China: Is it Overheating?

I know that I don’t have a sufficient background on the Chinese economy.  However, since the yuan was unpegged from the U.S. dollar in 2005 and since the United States (China’s largest importer) is starting to import less from China as a result of the slowly appreciating yuan, China has to find ways to stimulate its domestic demand.  Dave’s trade finance article as well as my most recent article, discusses an “overheating” Chinese economy.  Nevertheless, I just found an article on Forbes’ website http://www.forbes.com/business/2006/04/21/china-economy-growth-cx_0424oxford.html that claims the economy isn’t overheating.  While I can’t find more resources on the current conditions of the economy at this moment, I can’t see why the authors think that the economy isn’t overheating.  The article even makes the claim that the money supply is increasing with an increasing trade surplus (as the U.S. is importing less goods), but this doesn’t add up to the line of reasoning from my article or Dave’s.  Both of our articles discuss a rising interest rate.  The only way that the interest rate could increase with an increasing money supply is if the demand for money increases more than the supply of money.  However, I cannot confirm if this line of reasoning is accurate for the Chinese economy at this time.

My question for anybody who has an answer is what China should do to most efficiently stimulate its domestic economy so as to compensate for a recent decrease in imports by the United States.  I have tried to look for articles or even theoretical papers on domestic investment for stimulation, but I have not had luck thus far.

Protected: Trade Finance Article from The Economist

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A Look at 3-month CD and 3-month Eurodollar Interest Rates

Following our class discussion today on eurocurrency and interest rates, I went to the Federal Reserve website and obtained interest rates for both the 3-month Eurodollar deposits as well as the interest rates for 3-month CDs.  I plotted the data for a one-year period (from February 3, 2006, to January 26, 2007) and found that the two interest rates parallel each other’s movements.  The interest rate for the Eurodollar, however, has remained slightly higher than the 3-month CD.  Currently, the 3-month Eurodollar is roughly 0.03 percentage points higher than the 3-month CD.  (The link below is a one-year graph of the two interest rates.)

3-month CD and 3-month Eurodollar Interest Rate

Source: Federal Reserve Board Statistical Release H15: Selected Interest Rates (January 29, 2007)

Bank’s Inventory of Foreign Currency

Going back over my notes from the 1/31 class, I am still a little confused about the example with the purchase of 300 GBP (British Pound) of ale.  The example talked about the bank needing to increase its inventory of British Pounds because it had to transfer the 300 GBP to a U.S. importer.  I guess, how does the British bank determine how much it needs in its inventory for British Pounds when it enters the wholesale market?  Since there are less regulations (or no banking regulations) in some countries outside of the United States, does this bank know that it needs to increase its inventory in British Pounds because it deals with “x” amount of transactions per day requiring a certain inventory?  If somebody knows the answer and can help me out as to why they would increase their inventory, that would be helpful.

Israel New Shekels

I will follow the Israel New Shekel using the Universal Currency Converter http://www.xe.com.  As of February 1, 2007 (since Israel is 7 hours ahead of East Coast of the United States), 1 USD = 4.25244 ILS.  Possibly for viewing a chart of the exchange rate between the USD and the ILS, I will use the the currency converter feature on the Yahoo! Finance site at http://finance.yahoo.com.  Below is a one-year look at the USD-ILS exchange rate.  In March 2006, it peaked to a little over 4.7 ILS to 1 USD, but since then has fallen and hovered between 4.1 and 4.3 ILS to 1 USD.

Reaction to Angela’s Posting of “Bobbing Back Up?” (The Economist)

Angela did a good job on summarizing The Economist’s inflation article “Bobbing Back Up?”  I’m just a little confused as to why the price of a barrel of oil has fallen from a high of $80 to just under $50 during the middle of January, and yet, the inflationary measures (as reported in the consumer price inflation) rose from 1.7% to 2.1%.  I guess I don’t see the correlation as to why this article parallels the price for a barrel of oil decreasing with the unexpected increase in producer prices.  I also was a little confused with the term “volatile, ‘non-representative’ figures” as a measurement that is left out from price indexes.  These two points of confusion may be the answer as to why the inflation figures rose a full percentage point higher than the 2% target rate for the Bank of London, which prompted the Bank of London to unexpectedly raise interest rates to match inflationary expectations.

 Even with my few questions pertaining to the introduction to this article, Angela’s summary is dead-on with the reasons behind the relatively low inflation experienced throughout much of the world over the past decade.  To keep the yuan artificially weak against the U.S. dollar, China has large holdings of U.S. securities in order to sell goods to the United States and Europe at a cheaper rate.  However, both England and the United States, especially the U.S. according to this article, want China to float its own exchange rate to make China’s exports more expensive.  This protectionist ideology is in place simply to cool off the “overheating economy” with high inflationary pressures.  In addition to examining the economy of China, this article looks at how Japan wants to strengthen the yen by getting people to borrow in the Japanese economy with low interest rates and invest in higher-yielding assets in other countries where the rates are much higher.

This article briefly mentions the connection between a large labor pool and relatively low inflation due to the abilities for companies to outsource and provide a cheaper product, which ultimately leaves the consumer with more disposable income.  This may be totally incorrect or too much of a stretch, but my question here is whether an increase in disposable personal income (which means that consumers have more money to invest) would lead to an increase in the money supply and the eventual increase in the aggregate prices or just serve as a multiplier effect as the money trickles through the economy?

An Introduction

What can I contribute to this class of International Finance?  Well unfortunately, I have no formal background as of now on this particular subject matter because I have yet to take International Economics or any upper-level political science and/or international affairs classes.  However, through my readings and the day-to-day news, I hope to have a better grasp as to how economic indicators (i.e. balance of payments in various countries, interest rates, exchange rates, etc.) interrelate and affect the countries’ economies.  At this point in time, I feel that my career path will eventually deal with macroeconomic topics, especially those in the international field.  I’m a diligent worker and I ask questions when I don’t understand the lectures.  So, the best that I can do at this point in time is listen intently to the material and to what other people have to say and use my economics background to help and try to make sense as to why certain economies are behaving the way they are.