Driving Forces Which Influence Exchange Rates in the Global Market

Abstract

The foreign exchange market is a market where foreign currencies are bought and sold. If an Indian importer imports goods from the USA and has to make payments in US dollars, it will approach the foreign exchange market to buy US dollars for rupees. An exchange rate is simply a price of one nation’s currency in terms of another currency. An exchange rate is determined by the supply and demand factor. There are various factors which determined the demand and supply of a company, such as economy foreign trade and the activities of international investors, cash flows, given their size and mobility. Currencies are very sensitive to change or anticipated change in interest rate and to foreign risk factor. Key drive that affects the exchange rate includes: interest rate differentiate net expected inflation, trading activities in other currencies, international capital and trade flows, international institutional and investors sentiment, financial and political stability, monetary policy and central bank, domestic debt level, economic fundamental.
A currency will tend to become more variable whenever demand for it is greater than available supply. Increase demand for a currency is due to either an increased transaction demand for money or an increased speculative demand for money.