Question

Discuss the factors which affect supply and demand of exchange rates?

Answer 1

The following are tge factors that affects the supply and demand of exchange rates

1.Inflation: Countries with lower inflation would have an appreciation in the value of their currency and hence in the foreign exchange rate scenario, this currency would have more demand when compared to the other relative currencies

2. Interest rates: Higher interest rates are expected to cause an appreciation and hence it would attract more investment with an increased demand. Similarly a lower interest rate would cause a depreciation and would result in a decreased demand of investment.

3.Speculations: If there is a speculation that the value is going to rise in the future, this would cause an increased demand and hence the value would also be increased in the longer run. Similar is the case when the speculative effect is negative.

4. Competitiveness: If the market products are competitive, it would cause an increased demand which would cause the exchange rate to rise and vive versa.

5.Relative strength of other currencies: This is a major factor while considering the exchange rates as the rate of a particular currency would impact the relative exchange mechanism.

6. Government debt mechanism: If the investors have a fear that the government would debt on the investors, then it would cause a decline in the foreign exchange rate and vice versa.

7. Balance of payment and Economic conditions: If there is a deficit in the market mechanism, it would cause a depreciative effect and hence would have an impact of reducing the exchange mechanism which would likely reduce the exchange rates.

8.Government interventions: Devaluation and appreciation are the two major mechanisms adopted by a government to change the economic conditions of an economy which would have an influence on the exchange rate mechanism within the nation.