Exchange Rate: It is the value at which the currency of a country is converted to another.
$1 - ₦360
₦1 - $0.0028 (as at 22/10/2019)
This shows that the US dollar ($) is stronger than Nigeria Naira (₦). We are using US Dollar because it is the benchmark for other currencies.
External Reserve: It is the amount of money held by a country in foreign currrencies (in the case of Nigeria, it is held in dollars). It is from the foreign reserve that dollar used for importation are deducted.
Relationship Between Exchange Rate and Foreign Reserve
The relationship between Exchange rate and Foreign reserve cannot just be determined directly. Before a particular relationship between exchange rate and foreign reserve can be established then some other factors need to be considered like the foreign direct investment, amount of a country's import and export,
Hence, we can analyse the relationship between Exchange rate and foreign reserve through
1. High Export: A country with high exchange rate coupled with high level of exportation will have a huge external reserves. This is because with high exchange rate, import is cheaper for the importing country and hence they tends to buy more leading to higher earning on the part of the exporting country and as a result foreign reserve grows.
Take for example, South korea
Exchange rate of South Korea ($1 - ₩1,173 Korea won)
The South Korean Won (₩) is very weak (high exchange rate) as compared to the US dollar ($) yet their foreign reserve is very high.
This is to show that the high rate of exportation in South Korea contributes to their very high Foreign reserve ($US402 billion).
Here, we can say High exchange rate has positive relationship with Foreign reserve.
2. High rate of Importation: Import generally depletes the foreign reserve. When the level of importation of a country is very high then it will impact negatively on the foreign reserve particularly when exchange rate is high.
An example is the case of Nigeria, where the exchange rate is very high but with very weak foreign reserve.
In this situation, we can say that there is a negative relationship between Exchange rate and Foreign Reserve.
3. Foreign Direct investment: Foreign direct investment also have positive effect on the foreign reserve of a country. A country that attracts lots of foreign investors will have lots of foreign inflow which adds to the foreign reserve of that country.
Therefore, we cannot give a particular relationship between exchange rate and foreign reserve but instead before a relationship can be determined or established, we need to consider some other factors that affects both exchange rate and foreign reserve and the economy involved.
To have a better idea on this, there is need to analyze this assumptions using actual data to have a clear picture of how this play out.
Exchange Rate: It is the value at which the currency of a country is converted to another.
$1 - ₦360
₦1 - $0.0028 (as at 22/10/2019)
This shows that the US dollar ($) is stronger than Nigeria Naira (₦). We are using US Dollar because it is the benchmark for other currencies.
External Reserve: It is the amount of money held by a country in foreign currrencies (in the case of Nigeria, it is held in dollars). It is from the foreign reserve that dollar used for importation are deducted.
Relationship Between Exchange Rate and Foreign Reserve
The relationship between Exchange rate and Foreign reserve cannot just be determined directly. Before a particular relationship between exchange rate and foreign reserve can be established then some other factors need to be considered like the foreign direct investment, amount of a country's import and export,
Hence, we can analyse the relationship between Exchange rate and foreign reserve through
1. High Export: A country with high exchange rate coupled with high level of exportation will have a huge external reserves. This is because with high exchange rate, import is cheaper for the importing country and hence they tends to buy more leading to higher earning on the part of the exporting country and as a result foreign reserve grows.
Take for example, South korea
Exchange rate of South Korea ($1 - ₩1,173 Korea won)
The South Korean Won (₩) is very weak (high exchange rate) as compared to the US dollar ($) yet their foreign reserve is very high.
This is to show that the high rate of exportation in South Korea contributes to their very high Foreign reserve ($US402 billion).
Here, we can say High exchange rate has positive relationship with Foreign reserve.
2. High rate of Importation: Import generally depletes the foreign reserve. When the level of importation of a country is very high then it will impact negatively on the foreign reserve particularly when exchange rate is high.
An example is the case of Nigeria, where the exchange rate is very high but with very weak foreign reserve.
In this situation, we can say that there is a negative relationship between Exchange rate and Foreign Reserve.
3. Foreign Direct investment: Foreign direct investment also have positive effect on the foreign reserve of a country. A country that attracts lots of foreign investors will have lots of foreign inflow which adds to the foreign reserve of that country.
Therefore, we cannot give a particular relationship between exchange rate and foreign reserve but instead before a relationship can be determined or established, we need to consider some other factors that affects both exchange rate and foreign reserve and the economy involved.
To have a better idea on this, there is need to analyze this assumptions using actual data to have a clear picture of how this play out.
To get a clear picture, visit Giftedanalysts.com to learn more from a well analysed data