In The Most General Sense Exchange Rates Are Determined By
| An exchange rate is nothing but the price of one currency in terms of another currency. Exchange rates are determined on foreign exchange markets throughout the world. |
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They are also determined in the long run by a country’s supply and demand for imports and exports, but in the short term speculation can make them fluctuate, and the exchange rate movements keep fluctuating according to various news and events in that country.
The exchange rate is determined in terms of its supply and demand. For instance, if we consider the exchange value of the dollar, then the international supply of dollars is provided by all the Americans who wish to purchase foreign services, goods and foreign financial assets such as bonds and stocks. But the international demand for dollars is provided by foreign nationals who intend to purchase the US services, goods and the US financial assets such as bonds and stocks.
The currency supply and demand is greatly dictated and influenced by certain important factors that include inflation rates, interest rates, economic growth, and political and economic risks involved. The degree of difference in the interest rates will also affect the equilibrium exchange rate. Investors always prefer to stick with politically and economically stable nations having low risk currencies, which are naturally more highly valued. Any nation with a strong economic growth curve will definitely attract more investors and there will be more capital inflow to gain control over the domestic assets in that country. The increased demand for domestic assets will in turn make the currency even stronger.
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In The Most General Sense Exchange Rates Are Determined By