What are the Factors affecting exchange rate fluctuations?
Let’s learn more about Factors affecting exchange rate fluctuations. Some of the reasons of fluctuation in exchange rate are as follows:
- Interest Rate: When interest rate in home country is higher than other country, more foreign investor will be attracted to invest in home country to make capital gain. In this case demand for home countries currency will increase and may cause it to appreciate.
- Balance of Trade: When in country’s balance of payment the export is greater than importer we call there is surplus. Normally it has been the country which face the surplus there currency value increase than country which make deficit.
- The other way to look as it is that when exports are more than imports, more importers will sell foreign currency that received by exporting which increases demand for home currency which results in appreciation of currency.
- Money Supply & Inflations: At the time central bank of country will print more money, the supply of money will increase in the market. Which results in increase in purchasing power of customer also and which ultimately increases inflation. Since inflation and currency values are inversely related with increase in inflation currency depreciates.
- Foreign Debt: With borrowing comes an obligation to repay the money along with interest. So when a country borrows more foreign debt it needs more foreign currency to repay that loan, which makes it to sell more home currency to buy foreign currency resulting in depreciation of home currency.
Practice Questions
1. What are the factors that affect exchange rate fluctuations?
A) Economic and political events, interest rates, and market sentiment
B) Social media trends, weather patterns, and personal preferences
C) Currency printing policies, taxes, and regulations
2. How do economic events affect exchange rates?
A) They have little to no effect on exchange rates
B) They can cause fluctuations in demand for a currency based on economic indicators such as GDP, inflation, and unemployment rates
C) They can only affect exchange rates if they are related to the foreign exchange market
3. How do interest rates affect exchange rates?
A) Higher interest rates attract foreign investment and increase demand for a currency
B) Lower interest rates attract foreign investment and increase demand for a currency
C) Interest rates have no effect on exchange rates
4. How does market sentiment affect exchange rates?
A) Positive sentiment towards a country’s economy can increase demand for its currency
B) Negative sentiment towards a country’s economy can decrease demand for its currency
C) Market sentiment has no effect on exchange rates
Answers:
1. A
2. B
3. A
4. A
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