Question

Briefly explain the factors which determine currency exchange rates.  What kinds of factors cause exchange rates to vary over time? How are the international parity conditions involved in exchange rate determination?

Answer 1

There are various kinds of factor which will determine the currency exchange rates-

A. Inflation in a domestic country-inflation in the domestic country is higher, it will mean that the domestic currency will be depreciating against another currencies

B. interest rates in domestic currency is another important factor in determining the currency exchange rate

C. political stability in the domestic currency is another important factor because various investors look for political stability in domestic country

D. Intervention by central government in the exchange markets are also an important factor for determining the the exchange rate between two currencies

E. Growth rate of a country in terms of its gross domestic product is also important in determining the currency exchange rates

F .Employment data related to a country is also important in determining the currency exchange rate.

There would be various macro data which will be keeping on fluctuating the exchange rates overtime like job reports in a country or trade war for various short-term event that will keep the exchange rate fluctuating.

International priority conditions will help the exchange rate because there would be a large number of market participants which will determine the exchange rate based on various condition prevailing in two different markets on the basis of the purchasing power as well as inflation.