Question

What are some of the important factors that influence exchange rates? How reliable are these factors in predicting or forecasting exchange rate movements? (about 250 words)

Answer 1

Following are some of the important factors influencing exchange rates :-

Interest rates :- Changes in Interset rate in countries affects the value of currency of that country as increase in Interest causes increse in value of currency because of higher interest rate causes rise in foreign capital which rises exchange rates.

Rate of inflation :- Inflation in country impact it's foreign exchange rates as country with lower inflation will have higher exchange rate.

Balance of countrys current account :- Current account balance increases with export and decreses with import.A country having more import than export have deficit in its current account which depreciates the currency of the country.

Above mentioned factors can be relied for forecasting foreign exchange rate as the interset rate, inflation and exchange are related with each other any movement in any of them impact each other.So these factors can be relied for predicting exchange rate.