Doing Business In The Spanish Economy

1667 words - 7 pages

The Spanish Peseta had some good times and some bad times compared to the US Dollar and the Japanese Yen during September 2000 until August 2002. Looking at this two year period as a whole, the Spanish Peseta appreciated in value against both the dollar and the yen. This is where the similarities stop though. First off, we'll examine how the peseta fared against the dollar. As I already mentioned, looking at the beginning and ending rates, you can see that the peseta strengthened against the dollar; however, it was hardly a continuous appreciation. From September 2000 until the end of the year the peseta strengthened against the dollar, but the beginning of 2001 marked the beginning of a period of depreciation for the peseta. This depreciation lasted for the first half of the year. Each month during this time, the currency was devalued at about 3.5 pesetas per dollar. The third quarter of 2001 stabilized the peseta once again and started it back on its course of appreciation, which lasted until August of 2002. (Antweiler)

The peseta had a very strong showing against the Yen during this two year period. The peseta started appreciating in value from the very beginning of this period and just kept getting stronger and stronger the entire time. The peseta strengthened against the Yen during every quarter except for the second quarter of 2001. In conclusion, the peseta faired basically the same against both currencies. During the two year period as a whole, the peseta strengthened against both currencies. Also, both currencies had a period in the first part of 2001 where the peseta depreciated against them. The only difference between the currencies is that for the year 2001 the peseta was slightly devalued against the dollar, whereas the peseta appreciated against the yen for the calendar year of 2001. (Antweiler)

Many factors are involved in making up the value of an exchange rate. This makes it very difficult to contribute changes to a specific economic factor; however, it is still possible to examine how certain factors can generally affect an exchange rate. For example, a higher inflation rate usually signifies a weaker currency. In the year 2001, Spain experienced an inflation rate of about 3.8% while the United States had a rate of about 2.8% (Globus and NTDB). The purchasing-power parity states that if the domestic inflation rate is lower than that in the foreign country, the domestic currency should be stronger that that of the foreign country. Then according to that definition one would assume that the Peseta depreciated against the Dollar. If you look at the chart you can see that this assumption is correct because at the beginning of 2001 the rate was 177.39 ESP/USD and at the end it was 186.54 ESP/USD. (Globus and NTDB)

The balance of payments situation also has an affect on the exchange rate. A current account deficit generally signifies a weaker currency. In 2001, the merchandise balance deficit in...

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