Factors affecting the exchange rate
The conversion process involves sellingone currency and the purchase of another, while their relative amount determines the exchange rate. An exchange is taking place in the relevant market. The exchange rate is the value of one currency, which is expressed in units of another. Certain factors influence it. They are divided into political, economic and social. The main factors of the first group are the policy of the central bank, the nature of economic activities and the level of instability in the situation in politics.
Economic factors affectthe exchange rate through the following criteria: parity of purchasing power, relative interest rates and demand for capital, and its supply. In addition, they can include economic conditions. They are characterized by the following components: inflation rate, unemployment, balance of payments, tax rates, money supply and economic growth affecting the exchange rate.
The purchasing power parity representsa corresponding indicator for different currencies. Its definition is by comparing prices for a particular commodity of different countries in the process of recalculation on the US dollar through the exchange rate. Its meaning can be explained by a simpler explanation. If one country owns a thing with a lower cost than another, it must be exported to the place where it costs more. The conclusion is this: if there was an opportunity to purchase the same goods by the quantity in each of the states for an equivalent number of currencies, then the international economy would not bring any profit.
Comparison of percentage relative ratesalso affects the exchange rate as an economic factor. This process involves comparing interest rates expressed in different currencies. Those that have the highest rates, enjoy increased demand among investors who want to receive exceptionally high returns. Any changes in the demand for capital and its supply on the client market have an impact on the rates of the interbank market that affects the exchange rate.
Social factors are very often calledthe location of the spirit of the market. These are the opinions of traders about the short-term outlook for currency movements. They quite often affect the changes in the exchange rate and can be either positive or negative. The first option is to strengthen the currency, and the second - its weakening.
In addition to all named factors that influenceon the exchange rate, it is worth paying attention to its correlation with inflation. The reduction in the value of a monetary unit is facilitated by an accelerated increase in the money supply. This leads to an increase in prices and promotes an increase in the efficiency of the import of currency, the expansion of demand for it, and the fall in its rate.
Market changes are not liable exclusively to a fixed exchange rate, which is set by the national bank and the state.