The Impact of US Dollar Fluctuations on Global Currencies: A Case Study of Venezuela

This research analyzes the impact of US dollar fluctuations on global currencies, focusing on the Venezuelan bolivar. It examines the factors contributing to the changes in the US dollar since Donald Trump's election in 2016 and explores the implications for Venezuela's economic and political landscape. The study utilizes academic journals and newsletters to provide a comprehensive understanding of the complex interplay between currency exchange rates, political events, and economic policies.

Accounting
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Abstract:
The following research has been conducted in order to analyse and identify the changes which
have occurred in the US dollar currency since the election of Donald Trump as US president in
the year 2016. The changes which have occurred in the currency and their impact on other
currencies have been analysed in this report. The purpose of the report is to investigate and
obtained an information about the factors which have resulted in changes in the Venezuelan
currency, The research is significant to analyse and assess the impact and relation of changes in
the US currency and to obtain knowledge about the factors resulting in those changes so that
major investment decision and business decision can be taken by the users. The research has
been conducted by collecting and evaluating the various academic journals related top currency
changes and newsletters published in the context. The information about various reforms and
political influences which have resulted in these currency changes have been evaluated in this
report. The results and findings established that the currency changes in US dollars ahs
significantly affected the major economies of the world and it has been a determining factor in
taking various investment decisions.
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Contents
Abstract:...........................................................................................................................................2
Introduction:....................................................................................................................................4
Literature review:.........................................................................................................................5
Description of the event and data collection:..............................................................................7
Analysis and discussion:..............................................................................................................9
Conclusion:....................................................................................................................................13
References:....................................................................................................................................14
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Introduction:
The purpose of the report is to set out the basic structure explaining various impacts that the
changes in US dollar have on global currencies around the world. It can be observed that US
dollar considered as a reserve currency in the global economy of the world is responsible for
pricing the assets around the world including the various commodities. The currency has been
borrowed globally and internationally as a highly liquid and credible source of funding in order
to finance the business. It is available cross border and the changes in this currency will
significantly affect the borrowing power of the other countries economy. Therefore it is critical
to understand the behaviour of this currency in context of other currencies in the world and the
common impact it creates around the world. Also the report will include the explanation about
various changes which have impacted the value of currency of Venezuela. The fluctuations in the
currency along with the effect of US dollar changes will be analysed in this report. The various
reforms which have been introduced in Venezuela in late 2008 will be discussed in this report
and this will help the users in establishing knowledge about the significant pressures and
influences which have resulted in devaluation of this currency against the US dollar. The
exchange rates are subject to fluctuation recognized in various types of economic and political
factors and the effect of these factors together with the examples will be explained in this report.
The use of various academic journals and newsletters will help in establishing a sound report
along with necessary justifications of the findings. The use of this currency exchange
information will allow the users to take the investment and borrowing decision and investigating
abut the influence that US dollar ahs on other currencies.
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Literature review:
There are various studies and researched which have been conducted on financial economics to
explain the fluctuations in the currency exchange rates and stock market. These studies are based
on several approaches which contains ‘Random Walk Hypothesis Approach’ in which present
prices of the stocks are not related with past stock prices. In this approach the exchange rates are
not dependent on the past data. The other approach is concerned with ‘Efficient market
hypothesis’ in which asset prices reflects the exchange rates and stock prices in an economy.
Marta Kulesza, (2017), stated in his research that a change in the foreign exchange rates of
currencies is concerned with random walk process. However there have been researches in which
the prediction about changes in exchange rates have been made by using purchasing power
parity. interest rate parity and uncovered interest rate parity condition. There are various
evidences which show that the political uncertainty resulting form the presidential elections in
US in the year 2016 have resulted in high volatility of market especially in regard to changes in
policy concerned with US. The results of the US presidential elections were against all the
predictions and polls in which the Republican candidate –Donald Trump claimed a significant
win while defeating the nominee of Democratic party Hilary Clinton. By recognizing the effect
of trump win on the US dollar it can be established that the almighty dollar is struggling in the
market. The market review shows that the currency has lost significantly its value by 10% in the
year 2017 making it as bad as starting for the year 2018 (Bruno & Shin, 2015). It can be
observed that the currency fluctuations are inevitable but the dollar is falling under the context of
market which is historically associated with increase in the value. It may be likely that the
president Donald trump is responsible for the weak performance of dollar in 2017.
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(Source: María Belén Wu, 2016)
In the concerned year of 2017 US dollar lost around10% against the Euro and around 5.5%
against the renminbi. The US dollar has been the second worst performer among the major
currencies around the world after the New Zealand dollar. The drop in the prices of dollars was
the steepest in more than a decade even after there has been a three interest rate hikes during the
year and there was the passage if trump tax reform which would have predicted the value to be
going upward in the economy. The major reason which is expected for the decline is the trump’s
effect on his global standing of the country.
Marta Kulesza, (2017), in his research stated that after coming to the power the president of
Venezuela Nicolas Maduro invented new economic policies and there were significant
announcements which affected the foreign exchange rates. It has been recognized that the bolivar
market prices has fallen by 99.99% when it I paired with the US dollar. By recognizing the
prices on the black market the bolivar prices was 231.3 thousand for $1. It can be seen that
Bolivarian Republic of Venezuela has been experiencing a significant chaotic phase which is
concerned with a high slowdown in economy of the country, also the annual inflation of the
country is heading at its peak of and beyond 60% and ten countries has been experiencing the
shortage of essential goods. The main problem associated with this slowdown in economy is
associated with dysfunctional exchange rate system of the country and the dollar crunch which
has been stemming out of it immediately (Kiguel, et. al., 2016).
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Description of the event and data collection:
The strong position of the US dollar is a matter of concern not only for the technology sector all
around the world but it is also crucial for all major companies as the major companies derive
their values from the dealing outside the country including imports and exports and thus
exchange rate fluctuation affect the same.
(Source: María Belén Wu, 2016)
It has been observed that the US dollar has a good rally in the year 2014 and 2015 and the
beginning of the year 2016 also started at a positive note. However after February 2016, there
was a decline in the value of US dollar against major currencies all around the world (Bruno &
Shin, 2015). The chart which has been shown above helps in showing the performance of major
power shares ETF, which assist in following the US dollar price movements. On 11 April 2016
there was a decline experienced in US dollar which was 9 months lowest. After that on April 7,
2016 the dollar fell 107.7 against the Japanese yen (DXJ), a 17-month low. Therefore since the
beginning of the presidential elections the UD dollar has lost around 10% of its value against
other currencies in the market. The federal Reserve took a decision on March 16, 2016 for
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keeping the steady interest rates between .25% to .5% which as represented with hawkish
monetary outlook in the year 2016. The cautious approach followed by the Federal Reserve also
caused the slowdown in value of UD dollar. It has been observed that since Trump has been
elected as a president of America, his administration has blown out in certain ways concerning
hot and cold on its various commitments towards different alliances. The quick temper of Trump
along with his willingness to play the battle of nuclear bomb has given a rise and has helped
bolster the reputation of US as a security guarantor (Reboredo, et. al., ., 2014). There is no
wonder that the share of global exchange reserve as reported by the country to International
monetary fund has been at its lowest since the middle of 2014 and this is the data till the third
quarter of 2016. The same has been declined over the first three quarters of this year in 2016.
However trump has declared in the favour of weak dollar because the same helps in effecting the
trade competitiveness but the US currency is not weakening due to any consistent policy but it’s
the trump behaviour which is leading towards this.
The Venezuelan bolivar which is the official currency of Venezuela has been operating under a
supervised and controlled system for about 12 years. The currency has gone under certain
devaluations periodically but still it is considered to be overvalued at the official exchange rate.
But it has also been observed that the value of currency is 30 times lower than on the black
market. The country has a complex and multilayered exchange rate system which offers different
and variety of exchange rates. The first exchange rate offered ion the county is the official
exchange rate which is intended for importing various types of foods and medicines and the
second exchange rate is for the priority sectors of the country. The government has the authority
to control all these exchange rates considering the economic and political policy of the country.
In the year 2015 and month of February the government of Venezuela introduced and announced
a new exchange rate system in the country which was an attempt to de-control and manage the
currency. The new mechanism introduced in the country does not resulted in the end of tier
system but it allowed for legal buying and selling of bolivars while the price associated with the
currency will be determined in regard to demand and supply or the market rate (Reboredo, et. al.,
., 2014). As per the president of Venezuela the new exchange rate system of the country will
account for only three to five present of the dollar dealing concerned with the country because
the new system will be under trial for the country.
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Analysis and discussion:
The studies indicates that the after the Trump win in presidential elections of 2016 the US dollar
started surging against the pound. The same helped in reflecting the fact that the businessman
and investors of US that the win of trump would mean cutting taxes, boosting the in vesting in
country and accelerating the GDP growth rate of country at a significant rate. However since
2016 greenback has fallen .7823 against the pound. There were many reasons associated with the
failure in these interpretations and the dollar becoming lower in value (Kiguel, et. al., 2016).
Trump being investing form obstruction of justice – It has been observed that trump has ben
dragging down the buck due to special prosecutor has been looking into claims that the president
run has been trying to interfere in the investigation of FBI. If the same proves to be true then it
will lead trump to be impeached and this will make the US economy more politically volatile in
accordance to the market forces. The same will lead to weakening of US dollar.
President is dragging dollar because the economic reforms seems unlikely – The president has
been also weighing the greenback as with the investigation of Russia trump’s agenda for reviving
America and its economic growth will lead to nothing. However in particulate it seems like
trump and the congress may find themselves in a distraction in surge of the president scandals
while focust9ong on Americas tax system reforms. In this case the GDP growth rate will remain
middling and the aim of time for making America Make America Great America would
evaporate. This in turn is heavily weakening the US dollar.
Trump has been bucking because he has been said that the US dollar is too strong – There is
another reason for weakening of dollar against other currencies which is concerned with the view
of the American president that the US dollar is too string and this seems to be no beneficial for
the country and the trade. There was a press note released in which it was mentioned that the US
dollar is too strong and this is making restricted the companies of US to compete with others and
this is killing the economy of US. With this in mind it was predicted that the president may bring
down to an end the 30 years string dollar policy of America in order to weaken the greenback
and this will in turn will help the American companies in competing against the Chinese
companies (Reinhart & Santos, 2016). It the trump actively pursues this policy then it will bring
down the greenback. Therefore the lack of reform momentum is weakening the US dollar.
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Before the elections of US most of the market participants and economist were of the view that
UK vote in the EU referendum which could have resulted in Brexit was impossible but the vote
lead camp on the other side. The market has been experiencing post Brexit stock volatility. In the
year 2018 president trump shocked the international market by announcing and introducing his
intention to introduce 25% tariff on the imported aluminium (Cerra, 2016). This in turn resulted
in slamming the US dollar while in concurrence with the equity market and the trade became
more difficult.
(Source: María Belén Wu, 2016)
"There's just a general unease with international capital coming into the U.S. If you're not getting
capital coming in for political reasons then the current account deficit takes over," Sinche said.
His statement in this perspective reflected that the currencies of the countries will be positive
with account surplus. The same will include the currencies like Euro and Yen as they will
represent the currencies with account surplus which will be a positive difference between the
investment and nation savings. By considering the interest rate differences and purchasing parity
it can be concluded that US dollar will be more stable.
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The political and economic factors prevailing in the country will largely impact the foreign
exchange fluctuations and the policies of government regarding these policies in the financial
market. It can be seen that Venezuela is a major crude will exporter and the economy of the
country is significantly dependent on the imports (Cerra, 2016). Therefore the dollars earned in
the oil exports are crucial for the country. It has been established that the currency of Venezuela
bolivar fluerte has been subject to a controlled exchange regime in which whoever dealing in
exchange rates currency has to go through the government. However in reality the trade of the
country goes through country’s burgeoning currency black market where the exchange rates are
much lower than the official channels. The government official rate of currency is 600 times
stronger than the street value prevailing in the market. There has been a while since government
has been promising to close this gap between the official and unofficial rates of currency with the
help of the reforms latestly introduced in the exchange rates systems of the country.
(Source: María Belén Wu, 2016)
Unlike most previous rounds of forex reform of recent years, the new changes won’t add or
remove any existing exchange tiers. However the reforms introduced in the year 2008 were
largely related to Dicom exchange tier (Hajilee, et. al., 2014). It was then decided that the free
floating rates will be given for non-essential transactions which includes the transactions in
which the residents of the country goes abroad or businesses which are looking to import
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goods are covered under the Dipro rate. Therefore Dipro rates have been considered as the
alternative for stronger exchange rates which have been reserved for priority imports. In short
the Dipro rate can be considered as the exchange mechanism provided for important stuff in
the company. The main ideas behind the latest reforms were concerned with introducing
simplicity in the exchange rates mechanism which can be associated with fresh air for a system
(Reinhart & Santos, 2016). Also the reforms introduced which are concerned with online usage
of currency transactions has led to certain changes in the trends associated with the currency.
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Conclusion:
The above report concludes that the presidential elections held in the year 2016 and the victory
of Donald Trump have significantly affected the foreign exchange market of USA and
international market. The impact of trump policies and scandals has resulted in devaluation of
US dollar form 2016 and it has been continuing to impact the world economy in a larger context.
It can be concluded that the major currencies revolve around the exchange fluctuation in dollar
and the changes in economic and political scenario of America will determine the rationale
adopted by the economist and investors taking decision about investment in economy. The
political and economic factors have significantly affected the currency of Venezuela which has
been undergoing a transitional phase as against the world major currency dollar. The immediate
consequence of the reforms in the country’s political and economic system has resulted in
emergence of currency black market which has been fuelled in part by the imports concerned
with the country. The imports thus required payment in foreign currency. The financial crouch
will largely affect the borrowing capacity of the country.
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References:
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rates: a Markov-switching approach. Energy Economics, 54, pp.11-23.
 Bruno, V. and Shin, H.S., 2015. Capital flows and the risk-taking channel of monetary
policy. Journal of Monetary Economics, 71, pp.119-132.
 de Truchis, G. and Keddad, B., 2016. On the risk comovements between the crude oil
market and US dollar exchange rates. Economic Modelling, 52, pp.206-215.
 Hajilee, M. and Al Nasser, O.M., 2014. Exchange rate volatility and stock market
development in emerging economies. Journal of Post Keynesian Economics, 37(1),
pp.163-180.
 Investopedia, 2017, The impact of Venezuela currency exchange rates, Available at:
https://www.investopedia.com/articles/forex/022415/impact-venezuelas-bolivar-
exchange-rates.asp, Accessed on [12/05/2018]
 Kiguel, M.A., Lizondo, J.S. and O'Connell, S.A. eds., 2016. Parallel Exchange Rates in
Developing Countries. Springer.
Cerra, M.V., 2016. Inflation and The Black Market Exchange Rate in a Repressed
Market: A Model of Venezuela. International Monetary Fund.
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MONETARY AND ECONOMIC REFORM, No. 62, pp. 7-12.
 Marta Kulesza, 2017, Institute for International Political Economy Berlin, Inflation and
hyperinflation in Venezuela (1970s-2016) – a post-Keynesian interpretation, pp. 13-18
 Reboredo, J.C., Rivera-Castro, M.A. and Zebende, G.F., 2014. Oil and US dollar
exchange rate dependence: A detrended cross-correlation approach. Energy
Economics, 42, pp.132-139.
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The Case of Venezuela. Emerging Markets Finance and Trade, 52(2), pp.255-284.
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 Rezitis, A.N., 2015. The relationship between agricultural commodity prices, crude oil
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