FOREIGN EXCHANGE: DEPRECIATION VALUE OF CURRENCY

BY # FAIZ, NUR LIYANA AND NUR IZZATI

In the global economy cycle, economy fluctuations are common. In the foreign exchange market the increasing and decreasing in the value of it are regularly happen. By the way, the fluctuation of it does not only give an impact on that country itself but also give impact to all countries in the world that trade with it. The Asian financial crisis happened in 1998. Many countries were affected including Indonesia, South Korea, Thailand, Malaysia and many more. To overcome these problems, Prime Minister on that time, Tun Dr. Mahathir Mohamad using the fixed exchange rate system that binds the value of the ringgit at RM3.80 equal 1 US dollar. His actions have safe Malaysia and become the first countries that recover from that financial crisis.

Foreign exchange transactions are divided into three types. It is spot transactions, forward transactions and swap transaction. Spot transaction refers to foreign exchange transactions avowedly immediately. Forward transaction is an acquisition, the sale of goods or services at a certain price .While conversion of foreign currency between banks and companies categorized as swap transaction.

The exchange rate for the free market are determined by demand and supply of foreign currency on the foreign exchange market. Demand means the amount of foreign currency requested by a country's residents and firms to make payments on domestic assets imported from abroad and investment in foreign countries. While the supply of foreign currency means the amount of foreign currency needed by residents of foreign countries and firms to make payments on the export of goods, services and assets in that country.

For the foreign exchange rate system, it is divided into two types, variable exchange rate system and the fixed exchange rate system. The balance can be achieved through the market forces of the free market system, while the fixed exchange rate system is currency exchange rate of one currency to another that determined by the government.

However, there are a few factors that influence depreciation of the currency. Among the factors that influence the exchange rate is the inflation rate, interest rates, public debt, and political and economic stability. Changes in the value of currencies will affect the country through three channels such as international trade, investment channels and institutional channels. In terms of advantages of devaluation, it is adding value to the country because it can be an opportunity for the country become more competitive in the export market. However, the negative side depreciation of the currency impact is greater, especially people who have low income where it will affect domestic spending patterns .It causes an increase in the rate of inflation and also increase the prices of imported goods.

In conclusion, hopefully all parties can work together to play a great role in stabilizing our financial problems. As citizen, we also can contribute in this situation. We can choose to consume domestic goods against foreign goods. Finally, not only the government or the central bank should pay attention but all of us need to act as one to overcome this problem.