Market factors associated with fluctuations in business activity,
political and military-political situation, with the rumors (sometimes speculative), guesses and predictions. The exchange rate depends on how pessimistic or optimistic about the society in respect of government policy .
The higher the rate of inflation (inflation) in the country compared with other
States, the lower the rate of its currency, if not counteracted by other factors. Inflationary depreciation of money in the country causes a decrease in their purchasing power and a tendency to drop their exchange rate.
The exchange rate affects the degree of currency in world markets. In particular, the reliance on the U.S. dollar in international payments and international capital market is a constant demand for it and maintains its course even in the fall of its purchasing power or a deficit balance of payments.
Higher interest rates on deposits and (or) the yield of securities in any currency will increase demand for the currency and lead to its more expensive. Relatively higher interest rates and yields of securities in the country (in the absence of restrictions on capital flows) will lead, firstly, to flow into the country of foreign capital and accordingly – to increase the supply of foreign currency, its cheaper and more expensive local currency. Second, bringing higher revenue deposits and securities in national currency will help spill of national funds from the foreign exchange market, reducing demand for foreign currency, a decrease in foreign policy and currency appreciation.
If surplus countries is growing demand for its currency from foreign debtors, its rate may increase.
Major economic importance of the exchange rate makes it necessary to state regulation .
In addition to market factors, whose influence is difficult to envisage, on the demand and supply of currency, ie on the dynamics of its course, and impact on long-term trends that determine the position of a national currency in the monetary hierarchy (structural factors).
The structural factors include:
1. Product competitiveness in world markets and its changes. They are caused, ultimately technological determinants. Forced exports stimulates the flow of foreign currency.
2. The growth of national income causes an increased demand for foreign products, while merchandise imports may increase the outflow of foreign currency.
3. The consistent increase in domestic prices compared with prices in the markets of partner reinforces the desire to buy more cheap foreign goods, while the propensity of foreigners to purchase goods or services that become increasingly expensive, disappears. As a result of reduced supply of foreign currencies and the depreciation of the domestic happening.
4. Other things being equal, higher interest rates is a factor in attracting foreign capital and, accordingly, foreign currencies, and may also lead to higher prices of domestic. But rising interest rates has, as is known, and the dark side: it increases the cost of credit and a depressing effect on investment activity within the country.
5. The development of securities market (bonds, credit notes, shares, etc.) that make up a healthy competition of the foreign exchange market. The stock market may attract foreign currency directly, but also attract national funds, which would otherwise be used to buy foreign currency.
About the Author