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Factors which influence the exchange rate

Factor 2: Differentials in Interest Rates

❶Higher currency value will make exports expensive and imports cheaper for a country; contradict to this lower currency value will make imports expensive and exports cheaper for a country.

Determinants of Exchange Rates

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Factor 1: Differentials in Inflation

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The following are some of the principal determinants of the exchange rate between two countries. Note that these factors are in no particular order; like many aspects of economics, the relative importance of these factors is subject to much debate.

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Dec 03,  · The exchange rate is defined as "the rate at which one country's currency may be converted into another." It may fluctuate daily with the changing market forces of supply and demand of currencies from one country to another. For these reasons; when sending or receiving money internationally, it is important to understand what determines exchange rates/5().

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Determinants of Exchange Rates. Numerous factors determine exchange rates, and all are related to the trading relationship between two countries. Remember, exchange rates are relative, and are expressed as a comparison of the currencies of two countries. The following are some of the principal determinants of the exchange rate between two countries. The earliest model of the exchange rate, the monetary model, assumes that the current ex-change rate is determined by current funda-mental economic variables: money supplies and output levels of the countries. When the fundamentals are combined with market ex-pectations of future exchange rates, the model yields the value of the current exchange rate.

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ABSTRACT The purpose of this paper is to highlight the main determinants of the exchange rate from a monetary perspective. When the exchange rate is officially fixed, essentially the same monetary influences that determine the exchange rate affect the level of official settlements corresponding to the balance of payments surplus or deficit. The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of market determines the foreign exchange includes all aspects of buying, selling and exchanging currencies at current or determined prices. In terms of trading volume, it is by far the largest market in the world, followed by the Credit.