Factors Influencing The Exchange Rate

582 Words2 Pages
bulb-icon

Recommended: Exchange rate

Factors influencing the exchange rate

There are a several factors which can influence the exchange rate of a given country such as interest rate of a country, inflation rate and money supply. In some reason non-theoretical or non-economical factors can influence the exchange rate to appreciate or depreciate against the other currencies.

1. Inflation rate

How price and inflation rate can affect the exchange rate can be explained by Purchasing Power Parity (PPP) theory. In other words, PPP theory suggests that, in a long-term domestic inflation can influence the exchange rate. For example, a country with lower inflation exhibits an increasing currency value, as its purchasing power increases relative to other currencies. Countries with higher inflation rate usually meet depreciation of national currency since their trading partners have lower inflation rate and more appreciated currency.

2. Current account balance ( The balance of payments)

The balance of payments, as from view of foreign contractors, increases the demand for the national currency’s exchange rate. If there is ...

Show More
Related

  • Strong Or Weak Dollar Is Better?

    1908 Words  | 4 Pages

    So when the dollar is depreciating, the exchange rate becomes smaller. Exchange rate (foreign exchange rate, forex rate or FX rate) is the number of units of a given currency that can be purchased for one unit of another currency. The United States capital markets are becoming more attractive to foreign investors. Since the dollar is falling, it makes foreigner’s investment in the United States more affordable. Therefore, foreigners take this opportunity to invest in the United States.

    Read More

  • Macroeconomic Forecasting

    1873 Words  | 4 Pages

    Economic indicators often affect and influence the value of a country's currency. The Trade Deficit, the Gross National Product (GNP), Industrial Production, the Unemployment Rate, and Business Inventories are examples of economic indicators. We will be dealing with four specific indicators: interest rate, inflation, unemployment, and employment growth, as well as Real Gross Domestic Product (GDP). Real GDP is so called because the effects of inflation and depreciation are accounted for in the figures. The state of the economy is important both on a micro and macroeconomic level.

    Read More

  • Why Is It so Difficult to Forecast Exchange Rate Movements?

    1047 Words  | 3 Pages

    The stability of currency values plays a significant role for economic and financial stability. It is not difficult to see the exchange rate fluctuations are widely regarded as damaging. As the movements of the exchange rate have significant and large effects on the trade balance, resource allocation, domestic prices, interest rate, national income and other key economic variables. Then can exchange rate movements be predicted by these fundamental economic variables?

    Read More

  • Factors that Determine the Currency Exchange Rates

    3489 Words  | 7 Pages

    When people in the UK try to buy US goods and services they will supply pounds to US, however, when people from US try to by UK goods and services they will demand UK pounds. At this time, the price which keeps the demand and supply force in balance is the exchange rate between pound and dollar. As it shows in [IMAGE]Price of ï¿¡s in $s S D $1.5 (FIGURE 1.1) D S 0 Q Quantity ofï¿¡s figure1.1, when one pound equals one and a half dollars, the price is in equilibrium. Although floating exchange rate is mainly affect by market forces, actually sometimes a nation's central bank try to influence the exchange rate. They can use the way of adjusting the interest rate to influence the capital flow into or out of the country or directly buying or selling the currency.

    Read More

  • Exchange Rate Volatility And Trade Essay

    2536 Words  | 6 Pages

    According to first, direct channel impact, the volume of goods is affected by prices and profits that cannot be determined accurately because of exchange rate uncertainty. For example, a firm has two choices of purchasing; one is imported product and the second is a domestic substitute. They are equally valued in local currency terms using currency exchange rate levels. The firm would decide to buy domestic product if it is not clear what the exchange rate will be at the time of purchase. From this point of view, exchange rate uncertainty might affect the trade volume negatively. If hedging possibilities exist with reasonable costs it might reduce the exchange rate risk. In this case, the preceding view has to be modified. However, the forward markets could not eliminate the exchange rate uncertainty completely at reasonable cost, even in well developed forward markets financial institutions can provide only limited protection. So, exchange rate uncertainty has a direct negative effect on trade flows. The authors pointed to the second channel which is based on less straightforward explanation. According to the second channel, the exchange rate uncertainty effect depends on some decisions, which have an impact on trade flows over a longer period of time. The firm’s ability to predict the future income stream could be weakened by trading foreign

    Read More

  • International Investment and the Risks Posed by Fluctuations in the Value of Currencies

    1191 Words  | 3 Pages

    International investing is something that many investors find that they can benefit from for many reasons. Two of the main reasons why investors choose to invest in foreign markets are growth and diversification. Growth allows investors the potential to take advantage of new opportunities in foreign emerging markets. International markets can potentially offer opportunities that might not be available in the United States. Diversification allows investors to spread out their risk to different markets and foreign companies other than those just in the United States allowing them to potentially create larger returns on their investment as well as reducing risks. (U.S. Securities and Exchange Commission, 2012) While investing internationally can be a very lucrative and rewarding decision, there are also extra risks involved with investing internationally. One of the main risks that international investors encounter is foreign exchange risk also known as currency risk. Currency risk is a financial risk that is created by contact with unforeseen changes in the exchange rate between two currencies. These changes can cause unpredictable gains or losses when profits from investments are converted from a foreign currency to the United Stated dollar. There are precautions that can be taken by investors to potentially lower their risk of currency value fluctuations and other risk factors that are present in international investing. (Gibley, 2012)

    Read More

  • Exhange Risk Faced by Multinational Corporations (MNCs)

    1553 Words  | 4 Pages

    Economic risk is another type of exchange risks companies have to consider when dealing globally. Changes in exchange rates are bound to affect the relative prices on imports and exports, and that will again affect the competitiveness of a company. An UK exporter dealing with companies in the US would not want the US$ to depreciate, because it would make the exports more expensive for the US market, thus the company will loose business.

    Read More

  • Theories of Exchange Rate Determination

    837 Words  | 2 Pages

    Before discussing the economic literature on the relationship between interest rates and exchange rates in full, it will be useful to briefly discuss some of the important theories of exchange rate determination. There are many theories such as the theory of Purchasing Power Purchase Agreement (PPP), the Flexible Price Monetary Model (FPM), Sticky Price Monetary Model (SPM), Real Interest Rate Differential Model (RIRD), and Portfolio Balance Theory (PBT) of exchange rate determination. The PPP to maintain equality between domestic and foreign prices are based on the domestic currency through commodity arbitrage. If the equilibrium is violated, the same commodity after exchange rate adjustment will be sold at different prices in different countries. As a result, commodity arbitrage or buy a commodity at the same time the lower price and sell at the higher prices will lead back to the equilibrium exchange rate.

    Read More

  • Essay On Floating Exchange Rate

    2810 Words  | 6 Pages

    This is an exchange rate system where the currency exchange rate system is allowed to be determined by the forces of demand and supply. Here, the central bank and the government do intervene to cub extreme exchange rate fluctuation by adopting monetary or fiscal policy.

    Read More

  • J-Curve Case Study

    1005 Words  | 3 Pages

    Exchange rate is a highly crucial factor in determining a country’s growth, provided we are referring to an open-economy. Putting it simply, it acts as an indicator as to how an economy fares with respect to other economies. It determines both, the external position as well as the growth.

    Read More

  • Methods Of Forecasting Exchange Rates

    1119 Words  | 3 Pages

    There are various methods of forecasting the exchange rates between two or more countries’ currencies (Alvarez-Diaz, 2008). Prediction of exchange rates between countries helps to minimize risks while maximizing the returns. Some of these methods includes purchasing power parity (PPP), relative economic strength approach, econometric models, and time series models, among others.

    Read More

  • Inflation And Inflation Essay

    1766 Words  | 4 Pages

    As an aftereffect of inflation, the purchasing power of a unit of money falls. For instance, a pack of gum that costs $1 and if inflation rate is 2% then in a given year will cost $1.02 the following year. As products and services require more cash to buy, the implicit value of that currency falls.

    Read More

  • Inflation Essay

    645 Words  | 2 Pages

    There are many factors that affect the economy, inflation is one of them. Basically inflation is risingin priceof general goods and services above a period.As we see value of money is not valuable for the next years due to inflation. Today every country has facing inflationary condition in their economy.GDP deflator is a basictool that tells the price level of final goods and services domestically produced in an economy.GDP is stand for gross domestic product final value of goods and services, Furthermore GDP deflator shows that how much a change in the base year's GDP relies upon changes in the price level. . Inflation in contrast, how speedy the average prices intensity is increases or changes above the period so the inflation rate define the annual percentage rate changes in the level of price is as measure by GDP deflator more over GDP deflator has a advantage on consumer price index because it isn’t only based on a fixed basket of goods and services. It’s a most effective inflation tool to identify the changes in consumer consumption and newly produced goods and service are reflected by this deflator. Consumer price index (CPI) is also measure the adjusting the economic data it can also be eliminate the effects of inflation, through dividing a nominal quantity by price index to state the real quantity in term.

    Read More

  • The Foreign Exchange Market

    1006 Words  | 3 Pages

    The foreign exchange market is one of important mechanism in the international business because foreign exchange is an intermediary for all nations in term of the growth of the economy. There are many functions of foreign exchange market in the global economy. In the international business, it uses the foreign exchange markets in four ways. First, the pay...

    Read More

  • The Importance Of The Foreign Exchange Market

    1156 Words  | 3 Pages

    The Foreign Exchange Market deals with that task and it has to consider so many factors to be able to determine the exchange rates. The current exchange rate is floating, which means that it is up and down because of multiple reason or they can be fixed with another currency.

    Read More

More about Factors Influencing The Exchange Rate

Open Document