The exchange rate refers to the value of the US dollar against the values of currencies of other countries. The exchange rate between two countries’ currencies is particularly important if the two countries are heavily involved in trade.
What factors affect an exchange rate?
A country’s exchange rate is typically affected by the supply and demand for that country’s currency in international money exchange markets. If demand, for say dollars, exceeds supply, then the value of the dollar will go up. If however, the supply of dollars exceeds demand, then its value will go down. If INTEREST rates are LOWER in the US than in other countries, investors will choose NOT to invest in the US, decreasing demand for the dollar.
If world prices for what a country exports rise in comparison with the cost of that country’s imports, that country will be earning more for its exports than it pays for its imports.
Issues That Affect Foreign Exchange Trading
Executive Summary about rate of exchange By David R McLean
Just as markets or political conditions affect the price of stocks and bonds, so too are the valuations of currencies traded on the foreign exchange. Other factors that affect the foreign exchange trading are political events, market conditions; the political climate in a region of the world can also create a ripple effect in the foreign exchange markets. Political turmoil in a country can generate a massive move by market participants away from that country’s currency, and a destabilization in the currency’s value can occur. Is foreign exchange trading regulated?
Two factors make regulation of the foreign exchange nearly impossible now. The cross border transactions create a fluid, decentralized structure for foreign exchange trading. Each currency is bought or sold based on its own exchange rate.
Check out other guide on Exchange Currency