Pros and Cons of Currency Strenth in South Africa.

Topics: Currency, Foreign exchange market, United States dollar Pages: 7 (2285 words) Published: October 17, 2011
Prepared by: SEOKE L.J.

ASSIGNMENT TOPIC: a weak currency or a strong currency for the South African economy? What are the pros and cons of a weak currency or a strong currency in South Africa? Discuss.

A. Introduction
Cartoonists in South Africa have a long-running joke that shows a bruised and feeble coin, the rand, being beaten up by two muscled thugs, the dollar and the pound. In 2001 South Africa's currency was knocked down by two-fifths against the greenback, much of it in the closing weeks of the year.[The Economist (Jan 17th 2002)] Turnbull, Jdefines currency as something that is used or accepted by a lot of people. Looking at the definition in economic terms it can be explained as the system of money that a country uses.A currency with value that has depreciated significantly over time against other currencies is distinct as weak. The long-term outlook for a weak currency is that it will continue to lose value due to fundamental weaknesses in the nation that issues this currency. A weak currency is a currency said to be a less desirable form of payment than other currencies. These currencies generally trade at a discount in relation to currencies of economically developed countries. Foreign exchange dealers generally do not make markets in weak currencies, except for currency speculation. A dealer who expects a weak currency to decline in value may sell that currency short, making a profit from the difference in exchange rates. Acceptability of one currency versus another is dependent, of course, on local market conditions. The Portuguese escudo, for example, may be a weaker currency than the U.S. dollar, but its relative weakness may not be significant enough to discourage exporters from accepting it as payment. On the other hand a currency is strong when it is worth more relative to other currencies. This is because most currencies are floating, their values vary according to market trends. When one unit of a currency trades for more units of another currency, it is known as a strong currency. [Farlex Financial Dictionary. 2009] Strong currency is currency that lenders are willing to accept as payment, other than their own national currency. Also, a convertible currency trading in the exchange markets at a premium vis-à-vis other convertible currencies. Lenders have no legal obligation to accept payment in a strong currency. Central banks maintain a portion of their reserves in strong currency deposits. A strong currency is also known as a reserve currency. Most countries of the world have their own currencies: The United States has its dollar, the European Monetary Union as it euro; Brazil, its real; and china, its Yuan. Trade between countries involves the mutual exchange of different currencies. Mishkin (2010: 433) assert that “When an American firm buys foreign goods, services or financial assets, for example, U.S. dollars must be exchanged for foreign currency.” The South African currency is the South African rand (ZAR). The Rand is the legal tender and official currency of South Africa. The Rand was introduced in 1961 with the establishment of the Republic of South Africa, supplanting the South African Pound as legal tender at a rate of 2 Rand per Pound. One Rand can be divided into 100 cents. The Rand is available in banknotes of 10, 20, 50, 100, and 200 Rand denominations. It is also available in 9 coins in 1c, 2c, 5c, 10c, 20c, 50c, R1, R2, and R5 denominations. [Go Currency, 2009]

B. Economics overview
Since becoming independent, South Africa has developed into a middle-income, emerging market with an abundant supply of natural resources; well-developed financial, legal, communications, energy, and transport sectors, a stock exchange that ranks among the ten largest in the world, and a modern infrastructure supporting an efficient distribution of goods. However, growth has not been strong enough to alleviate South Africa of a high unemployment rate and other economic problem...
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