Macrovariables in Determining the Exchange of the U.S. Dollar and Major Currencies (Economics ARTICLES‪)‬

INTRODUCTION The most well established theories of exchange rate determination are Purchasing Power Parity and Interest Rate Parity. If the absolute Purchasing Power Parity holds, this means that exchange rate is determined by relative prices in two countries and there would be no opportunity for arbitrage profit by speculating in the foreign exchange market. It has been found that although Purchasing Power Parity holds in the long run between the United States and other industrialized countries, Purchasing Power Parity does not hold between the United States and other developing countries. Therefore, there is reason to believe that exchange rate is determined not only by Purchasing Power Parity but there are other variables which are unique to each country for determining exchange rate. The absolute form of Purchasing Power Parity implies that if exchange rate changes deviates from PPP it affects the competitiveness of a country in international trade (Haque, 2003). Empirical studies failed to prove PPP holds, nevertheless, it remains a valid theory for Academicians and practitioners. If you are planning to take a job in Bangladesh, converting your U.S. salary into Bangladesh taka, it will not give you the true purchasing power, because cost of living in Bangladesh may be significantly lower. Most of the empirical study on Purchasing Power Parity has given negative results; therefore, this study tries to find what variables are important in determining exchange rate for each individual country. The results clearly indicate that even within the OECD and European Union countries there is significant difference in cost of living in different countries (Vachris & Thomas, 1999).