Literature Review

On
The Impact of Economic Factors on the Foreign Exchange Between
USA and Four Big Emerging Countries:
CHINA, INDIA, BRAZIL AND MEXICO

Submitted by:
Chetan Sahu
(1527905)

Submitted to:
T.S.Ramachandran
Associate Professor

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The Impact of Economic Factors on the Foreign Exchange Between

USA and Four Big Emerging Countries:
CHINA, INDIA, BRAZIL AND MEXICO
Article March 2016

Authors:
Nguyen Quang my
Alliant International University, San Diego, USA
Mustafa Sayim
Alliant International University, San Diego, USA

Publication:
International Finance and Banking
ISSN 2374-2089
2016, Vol. 3, No. 1

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The effect of monetary components influencing on the US outside trade approach toward
different nations is extremely urgent for MNCs (Multi-National Corporations) financial
specialists etc. US dollar is the most acknowledged and ordinarily utilized coin as a part of
universal exchange and was considered as the dollar standard for a drawn out stretch of time.
As per the Bank for Worldwide Settlements, 86% of all outside trade exchanges that occurred in
the month of April 2007 were against the U.S. dollar. Moreover, the U.S. dollar is still the worlds
save coin despite the fact that it is no more sponsored by gold. as a result of monetary joining
among nations, it is worth to investigate influencing large scale monetary elements on the outside
trades amongst USA and four rising nations, China, India, Brazil and Mexico to comprehend
why trade rates vacillate.
Authors defined relationship between variable through following regression
equation: EXCH = + 1INF + 2SIN + 3LIN + 4TRBALANCE + 5TRIM + 6TREX +
7PUBD + 8INTRE + 9FDITRANS + 10FDIINCOME + 11GDP +
Where, EXCH is the foreign exchange of USD, Chinese Yuan, Brazilian real, Indian rupee and
Mexican pesos from 2005 to 2014 quarterly, is the constant, 1 to 11 are the parameters to be
estimated, INF is the inflation rate, SIN and LIN is the short-term and long-term interest rate
respectively, TRBALANCE is the trade balance, TRIM is the import,
TREX is the export, PUBD is the public debt rate to GDP, and INTRE is international reserves,
FDITRANS is the foreign direct investment for financial transaction, FDIINCOME is the foreign
direct investment for Income, GDP is the growth rate and is the random error term.
CHINESE YAUN: China has been one of the world's quickest developing economies and has
risen as a noteworthy monetary and exchange player. China positioned first with $17.6 trillion,
somewhat higher than USA with $17.4 trillion. Rising US obligation consolidated with China's
rising monetary and money related abilities have driven a few investigators to figure the Chinese
Yuan would turn into the third reserve currency after dollar and euro. Research shows that factors
like long-term interest rate, short-term interest rate, inflation rate, GDP, public debt, national
reserve, trade balance, export and import have a strong relationship with the USD/CNY
exchange rate. But public debt, national reserve, export and import have a negative correlation.
98% of the total variance of the exchange rate can be explained by the five predictors.
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INDIAN RUPEE: India is considered as one of the biggest and quickest developing economies
in the world, which have been generally less influenced by the 2007-2008 worldwide monetary
emergencies. Authors study shows that long-term interest rate, short-term interest rate and trade
balance have negative relationships with USD/INR exchange rate. Import is not considered as a
variable for study due to high variability. Here 86.2% of total variance explained variability
about exchange rate. Also financial FDI, public debt, national reserve, trade balance have a
significant impact on USD/INR exchange rate. Author also uses STEPWISE multiple regressions
which reflect that four models which include public debt, national reserve reflects 79.6% of
correlation between observed value of outcome USD/INR.
BRAZIL: Brazils economy is the largest in Latin America and the second largest in the western
hemisphere. Brazil has a floating exchange rate system. The Brazilian real, experienced one of
the world's biggest trade rate devaluations amid the late worldwide monetary emergency. This
deterioration came about from Brazil's rising universal financialization. Study shows that macroeconomic factors have low correlations with USD/BRL exchange rate. Most of them have
negative relationship with the exchange rate except inflation, income FDI and interest rate.
Regression model excluded the trade balance due to its high variability. 77% correlation between
variables and USD/BRL, also many other factors reflect 59.3% of correlation. STEPWISE
method reflects that only 37.9% of the correlation between trade balance and variable.
MEXICO PESO: Mexico is the U.S. third-biggest exchanging accomplice. Mexico positions
third as a wellspring of U.S. imports, after China and Canada, and second after Canada as a fare
market for U.S. products and administrations. Due to U.S. prompted a drop in Mexico's fares and
a weakening in its terms of exchange additionally the atmosphere of compelling hazard
avoidance among worldwide speculators and the worldwide deleveraging handle altogether
obliged access to universal money related markets. inflation rate, long-term interest rate, shortterm interest rate, public debt and national reserve have strong correlations with USD/MXN
exchange rate. Also inflation rate and interest rate have negative relationships with USD/MXN
exchange rate. Her import was not taken due to high variability.

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Authors use only these variables to define relation and other factors remained constant. The
results reveal that GDP, inflation, public debt and international trade have statistically significant
impact USD/CNY exchange rate and ENTER method suggests that 98% of total variances in
USD/CNY exchange rate can be explained by the macro-economic factors (inflation, GDP,
exports etc.) It also suggested that macroeconomic policies need to be implemented in order to
stabilize the exchange rate and also to reduce. And factors like import need to be maintained
most as we have seen above that regression model neglect import in many cases. This study can
be applied on other countries to know better relationship between foreign exchange markets.

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BIBLIOGRAPHY
Quang My, N. & Sayim, M. (2016). The Impact of Economic Factors on the Foreign Exchange
Rates between USA and Four Big Emerging Countries: China, India, Brazil and Mexico.
International Finance And Banking, 3(1), 11. http://dx.doi.org/10.5296/ifb.v3i1.9108
Quang My, N. & Sayim, M. (2016). The Impact of Economic Factors on the Foreign Exchange
Rates between USA and Four Big Emerging Countries: China, India, Brazil and Mexico.
International Finance And Banking, 3(1), 11. http://dx.doi.org/10.5296/ifb.v3i1.9108
Mexico Overview. (2016). Worldbank.org. Retrieved 27 June 2016, from
http://www.worldbank.org/en/country/mexico/overview
Brazil. (2016). Worldbank.org. Retrieved 27 June 2016, from
http://www.worldbank.org/en/country/brazil
India Overview. (2016). Worldbank.org. Retrieved 27 June 2016, from
http://www.worldbank.org/en/country/india/overview

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