What factors determine the foreign exchange rate of a currency?

Answers.com > Wiki Answers > Categories > Business & Finance > Investing and Financial Markets > What factors determine the foreign exchange rate of a currency?
Answer:

1) Trade (exports/imports)

2) Interest Rates - increasing the interest rate causes 'hot' money to flow into the economy, therefore the demand the domestic currency increases, therefore the currency appreciates.

3) Inflation - relative inflation rates affects the economy's international competitiveness , so if the economy is experiencing higher inflation rate than its trading partners to such a situation that it is less competitive than they are, than there shall be less demand for the domestic currency as foreign markets will demand less goods and services from you, hence the demand for the domestic currency shall drop.

4) Speculation - simply a believe in the path the currency, shall cause speculators to adjust their trades in light of this believe. e.g. if currency speculators believe that an economy is overheating and soon there shall be a devaluation, then they will get out of the currency causing there to be bre more supply than demand on the forex for that currency, hence it depreciates.

First answer by ID1524189381. Last edit by ID1524189381. Question popularity: 4 [recommend question].

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