Question

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

Answer 1

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The factors which affect the demand and supply of foreign exchange are :-

1. Inflation Rates
A nation with a lower rate of inflation than another's will see an appreciation within the value of its currency. The expenses of products and services increase at a slower rate where the inflation is low. a nation with a consistently lower rate of inflation exhibits a rising currency value while a nation with higher inflation typically sees depreciation in its currency and is typically amid higher interest rates

2. Interest Rates
Changes in rate of interest affect currency value and dollar rate of exchange . Increases in interest rates cause a country's currency to increase because higher interest rates provide higher rates to lenders, thereby attracting more foreign capital, which causes an increase in exchange rates

3. Country’s accounting / Balance of Payments
A country’s accounting reflects balance of trade and earnings on foreign investment. It includes total number of transactions including its exports, imports, debt, etc. A deficit in accounting thanks to spending more of its currency on importing products than it's earning through sale of exports causes depreciation. Balance of payments fluctuates rate of exchange of its domestic currency.

4. Government Debt
Government debt is debt or public debt owned by the central government. a nation with government debt is a smaller amount likely to accumulate foreign capital, resulting in inflation. Foreign investors will sell their bonds within the open market if the market predicts government debt within a particular country. As a result, a decrease within the value of its rate of exchange will follow.

5. Terms of Trade
Related to current accounts and balance of payments, the terms of trade is that the ratio of export prices to import prices. A country's terms of trade improves if its exports prices rise at a greater rate than its imports prices. This leads to higher revenue, which causes a better demand for the country's currency and a rise in its currency's value. This leads to an appreciation of rate of exchange .

6. Political Stability & Performance
A country's political state and economic performance can affect its currency strength. a nation with less risk for political turmoil is more attractive to foreign investors, as a result, drawing investment faraway from other countries with more political and economic stability. Increase in foreign capital, in turn, results in an appreciation within the value of its domestic currency. a nation with sound financial and national trading policy doesn't give any room for uncertainty in value of its currency. But, a nation susceptible to political confusions may even see a depreciation in exchange rates.

7. Recession
When a nation experiences a recession, its interest rates are likely to fall, decreasing its chances to accumulate foreign capital. As a result, its currency weakens as compared thereto of other countries, therefore lowering the rate of exchange .

8. Speculation
If a country's currency value is predicted to rise, investors will demand more of that currency so as to form a profit within the near future. As a result, the worth of the currency will appreciate thanks to the rise in demand. With this increase in currency value comes an increase within the rate of exchange also .