The currency exchange rates of major countries drive international trade and commerce. When a country’s currency rate in the foreign exchange market rises, its imports become cheaper, and when the exchange rate of its national currency falls, imports become expensive. Therefore, it is important to have a strong and stable currency to make the most of your goods in international trade. Currency exchange rates are determined in two different ways: fixed rate and floating exchange rate.
Fixed exchange rates are those that are set by a country’s government through its central bank in relation to another currency. Countries that determine their currency against the US dollar include Saudi Arabia and China. On the other hand, a floating exchange rate is the currency which is decided by the macro factors, its demand and supply in the open market.
Read more: How do fluctuations in currency exchange rates affect your investments?
demand and supply
In alignment with traditional economic fundamentals, the exchange rate rises with demand, and declines with it. For example, when demand for the British pound sterling (GBP) increases among US traders and traders, the price of the pound in relation to the US dollar (USD) is likely to rise, but – of course – it will be subject to a . The extent of other geopolitical factors as well.
However, even in floating rates, countries often intervene to influence their currency so that it suits their advantage. In addition, there are many other factors in international trade, money markets and the overall global economy that affect currency exchange rates.
Read more: What is a currency pair and how does it work?
other factors
There are many factors that collectively affect the exchange rate of one currency in relation to another. These include inflation, GDP data, interest rate changes and unemployment. There are a number of short-term factors that affect the exchange rate such as daily demand and supply, natural or economic disasters and sometimes rumours. For example, when supply exceeds demand for currency, the exchange rate will crash, and when demand exceeds its supply, the exchange rate will jump.
And in case of a substantial drop or bounce, the central bank intervenes and buys or sells the currency to prevent volatility.
Other major factors affecting a currency’s exchange rate include government stability and geopolitical risks – which speak to the stability of stable governance in the country and the world around it, affecting international trade and running it. Currencies too.
Therefore, exchange rates of currencies are determined by many factors including demand and supply, macroeconomic factors, geopolitical stability, interest rates, GDP data, among other factors.
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