ld not pay their debts as well.From, it shows that companies must try to hedge themselves. If not, some of them will be bankrupt like some companies in Asian crisis.Government PoliciesGovernment sometimes will influence the exchange rate by direct and indirect ways. Direct way means that the government is trying to control or stablise the exchange rate by using policies. The exchange rate may increase the government debts or there is a strong negative effect to importers when the exchange rate depreciates and vice versa. Indirect way means that the government may try to control the economy’s growth and inflation and indirectly affect the exchange rate. I will discuss how government policies affect the exchange rate.Monetary PolicyInflation is a negative influence to the economy. The government always tries to control as low as possible. However, it may forego the economic growth because of that. Thus, the government will use different policies to expand or contract the economy. If the government is trying to control the inflation by using contractionary monetary policy, it means that the government starts to increase the interest rate and decrease the money supply. According to the Covered interest parity, the exchange rate will depreciate sharply. It results that there is a negative effect to exporters and the government if there is a budget deficit which borrows form overseas. The exporters will receive less for their exports and the government has to pay more interest. Hence, there is a risk for a company to lose money in that period. The materials imported from overseas are more expensive and the price of goods is hard to compete with overseas. However, the interest rate will come back to the original point because of higher interest rate attracting oversea funds to come into the country. If the government is trying to expand its economy, it will use the expansionary policy. Usually the govern...
