What are the potential problems of the short and long run volatilities in international currency market?

Question

What are the potential problems of the short and long run volatilities in international currency market?

Answer 1

Both microeconomic and macroeconomic factors effect exchange rate volatility in the short. The empirical results, however, indicate that a set of common factors seems to influence the exchange rate volatility, whereby the stock market is a great influence commonly found across countries. The Indonesian rupiah seems to be the most sensitive to the innovations in macroeconomic factors, while the Singapore dollar is the least.

The short and long term volatilities in international currency market directly effects the international market and BOP of the countries.

Answer 2

Currency trading is like any other commodity. Because of that a currency that is otherwise strong can succumb to speculative sell-offs and profit-taking in a bid to hedge against inflation.

Therefore a run in one direction or another will destabilize a currency despite its actual value or strength. However if one currency is destabilized, other currencies which may have less actual value could be over-valued and therefore create volatilities in the marketplace.

One way to control this is to limit speculation and force traders to have more at risk even if there is a "win" on a trade. This anti-windfall limitation tempers the trading within reasonable margins.

Right now there is nothing approaching that so currencies may become unstable despite their true value.