Factors That Determine the Currency Exchange Rates

Currency exchange rates can be categorised as floating, in which case they constantly change based on a number of factors, or they can subsequently be fixed to another currency, where they still float, but they additionally move in conjunction with the currency to which they are pegged. Floating rates are a reflection of market movement, demonstrating the principles of both demand and supply, as well as limit imbalances in the international financial system. Fixed exchange rates are predominantly used by developing countries as they are preferred for their greater stability. They grant further control to central banks to set currency values, and are often used to evade market abuse. (MacEachern, A. 2008; Simmons, P.

Which of the effects is not considered when choosing an exchange rate system (THE FISCAL ((SPENDING)) POLICY THAT THE CHOOSING COUNTRY WILL MAINTAIN)

For instance, Suppose Britain is the home country having the inflation rate of 2% and the foreign country which s Australia having an inflation of 8%.Then the foreign currency will have to depreciate by 6% (%∆e(foreign currency/domestic currency) = 6%) to help in offsetting the 6% fall in the real exchange rate caused by

With a free floating exchange rate, the value of the currency is simply determined by supply and demand of the market. The Central Bank cannot set a target exchange rate and intervene in the market exchange rate for this purpose.

To explore the real effects of exchange rate on trade balance, inflation has to be considered. When a country is experiencing inflation, the currency is devalued domestically despite the nominal exchange rate is still remained same in foreign exchange rate market. Most of the time, the impacts is not going to be effective immediately, but effective with the time passing. Increasing money supply will cause inflation, then the inflation will push down the real interest rate, According to interest rate parity, at the point in time, the exchange rate still remained the same, but the expected future exchange rate will be devalued.Therefore, the existing inflation will only have impacts on future exchange rate, but not

There are various factors that influence the exchange rate of a currency, such as: interest rates, current account balance, unemployment rate, gross domestic product, expectations on inflation rate, import and export capability of country, trade relationship of two countries, relative product price etc. In basic understanding these factors affect either demand or supply of currency and therefore exchange rate of currency. For example, if government of China determines the higher interest than USA then demand for Yuan in USA increases because foreign capital in china will increase due to potential higher rate of return on investment and by the law of supply and demand rate of Yuan too rises. Another example is China’s huge export amount which pushes the demand of Yuan in it’s trading partner nations, which is virtually all the world, subsequently leading to higher exchange rate.

Business dictionary defines an exchange rate as the rate at which one currency can be exchanged for another. In other words, it is the value of another country's currency compared to that of your own. If you are planning a trip to travel abroad this is something that needs to be calculated along the trip, because in order to purchase goods or services while aboard one would need to “purchase” the local currency. Just like the price of any asset, the exchange rate is the price at which you can buy that currency. If you are traveling within Europe, for example, and

Every country has its own currency, which is a means of payment and allows various types of financial transactions within the country. However, between different countries is also necessary to make any cash payments or transactions. An exchange rate measures the value of one currency against the value

One of the greatest example when a country moved towards managed exchange rate regime is France after World War I. France had the stable currency, Franc since 1803 but during the war there was huge emission of notes due to which the price level shoot up. In 1924, the country was nearing defaults when the government intervened and took many measures to stabilize the currency. It cut down expenditures, increased taxes, increased capital inflows. A new ceiling was introduced on money in circulation which resulted in ceasing of treasury bonds. All of these measures led to accumulation of foreign reserves and thus the value of Franc increased in the world market and the currency reached to 80% of its pre war

In the case of freely floating system, there are no official boundaries and rates are allowed to fluctuate daily. Whereas in the fixed regime, currencies are prevented from moving too far or fluctuating in a given direction by its government through the central bank. Its main disadvantage is that it has achieved so little and it’s not evident on whether it works or not.

The exchange rate between countries determines one currency’s strength in comparison to another. These rates also oversee the economic growth and the currency purchasing power of countries. Therefore, exchange rates are vital in ensuring that one country can maintain its value versus the US dollar which is the most dominant currency. Currently, the Euro/USD exchange rate is at 1.0666. This paper strives to give clear predictions on the value of the Euro against the USD short term and long term.

“Having endeavored to forecast exchange rates for more than half a century, I have understandably developed significant humility about my ability in this area…”[1]

Real exchange rate has significant effect on competitive positions. A decline in nations real exchange rate makes its exports more competitive and vice versa. Eg:1$=10 yen earlier 1$=8 yen now Hence Local currency profits would reduce Now if real exchange rate is 1 $=9 yen the performance of company would improve

The most common exchange rates implemented are the floating, pegged and fixed exchange rate. The pegged exchange rate is implemented through matching your exchange rate to another usually more stable currency such as the euro or the dollar. Whereas a fixed exchange rate is implemented through the government or the central bank. Lastly the floating is set by the FOREX.

Developing countries are not worrying about the currency movements, they often plan to use the fixed rate system should limit the speculation and provide a stable system to allow importers, exporters and investors. A central bank ability limits the fixed rate system which the interest rate adjust the desirable for economic growth. When a Currency becomes over valued or undervalued this system adjust to prevent the market. If the currency is under pressure this system reserve to support by the effective management.