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COLLAPSE

The countries considered for oil price and exchange rate analysis are as follows; Russia, Brazil, Mexico, Canada, and Norway. Out of the 18 oil producing countries, these five are the only ones that operate under a market determined exchange rate system. (2) This means the direct exchange rate of these currencies is dependent on the market or some form of supply and demand. Of course, this is just one factor that affects the exchange rate and according to our textbook there are a few others to consider. Such as, interest rates, cross-border investing, national debt, inflation, and trade balance. (1)(Pg.385) Furthermore, since these countries are heavily reliant on the export of oil, the exchange rate of their currencies can be directly affected by the increase or decrease in the price of oil. For example, today 6/8/2018 the current price of oil in Russia is 75.39 USD, and the exchange rate of currency is 1 USD – 62.4 RUB. (3) On 5/22/2018 the price oil was 79.68 USD and the exchange rate was 1 USD – 61.22 RUB. (3) This shows a direct correlation between the price of oil and Russia’s currency. Meaning as the price of oil goes up, so does the value of the Russian Rubble. (Note: When the exchange rate is lower, you will need less to trade for a USD, meaning the Rubble is more valuable)

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Solution

The analysis is right but it doesn\'t not fully reflect reality. Market determined exchange rate of any country is decided by supply and demand. Even other factors like interest rate,, cross border investment,, inflation, trade balance also affect exchange rate through the mechanism of supply and demand. E. G lower inflation and higher interest rate leads to more demand for currency of a country relative to its supply. This leads to appreciation of currency and fall in exchange rate. Anyway exchange rate of countries whose exchange rate is determined by market mechanism is most influenced by largest exports and imports.e.g greater exports of electric goods from japan leads to appreciation of yen. This principle applies to most economies and is not feature of only these opec countrues