Factors Affecting Foreign Exchange:
1. Fundamental factors:
- All such events that affect the basic economic and fiscal policies of the concerned government.
- These are basic economic policies followed by the government in relation to inflation, balance of payment position, unemployment, capacity utilization, trends in import and export, etc.
2. Political and psychological factors
3. Technical factors
- Capital movement
- Relative inflation rates
- Exchange rate policy and intervention
- Interest rates
- The anticipation of the market participants many times is the prime reason for exchange rate movements.
- Those speculators anticipate the events even before the actual data is out and position themselves accordingly to take advantage when the actual data confirms the anticipations.
Determination of Foreign Exchange Rates:
1. Balance of Payments
a. If payments by a country for its imports of goods and services, two possibilities arises
b. Foreign currency payments exceed receipts and there is a deficit. This puts the home currency of the country under downward pressure against foreign currencies.
2. Demand and Supply
3. Purchasing power parity
4. Interest rate-again relating to foreign trade
5. Relative income levels
6. Market expectations – developments regarding political and economic matters. Of a count