Key Concepts in International Currency and Exchange Rates

appreciating

when a currency is worth more in terms of other currencies; also called "strengthening"

arbitrage

the process of buying a good and selling goods across borders to take advantage of international price differences

depreciating

when a currency is worth less in terms of other currencies; also called "weakening"

dollarize

a country that is not the United States uses the U.S. dollar as its currency

floating exchange rate

a country lets the exchange rate market determine its currency's value

foreign direct investment (FDI)

purchasing more than ten percent of a firm or starting a new enterprise in another country

foreign exchange market

the market in which people use one currency to buy another currency

hard peg

an exchange rate policy in which the central bank sets a fixed and unchanging value for the exchange rate

hedge

using a financial transaction as protection against risk

international capital flows

flow of financial capital across national boundaries either as portfolio investment or direct investment

merged currency

when a nation chooses to use another nation's currency

portfolio investment

an investment in another country that is purely financial and does not involve any management responsibility

purchasing power parity (PPP)

the exchange rate that equalizes the prices of internationally traded goods across countries

soft peg

an exchange rate policy in which the government usually allows the market to set the exchange rate, but in some cases, especially if the exchange rate seems to be moving rapidly in one direction, the central bank will intervene

Tobin taxes

see international capital flows