Determinants of Exchange Rate
Exchange rate determination is Two-way process and following are factors that Influence Exchange Rates
Floating rates are determined by the market forces of supply and demand. How much demand there is in relation to supply of a currency will determine that currency 's value in relation to another currency. For example, if the demand for U.S. dollars by Europeans increases, the supply-demand relationship will cause an increase in price of the U.S. dollar in relation to the euro. There are countless geopolitical and economic announcements that affect the exchange rates between two countries, but a few of the most popular include: interest rate decisions, unemployment rates, inflation reports, gross domestic product numbers and manufacturing information. (Levich, 2001)
Some countries may decide to use a pegged exchange rate that is set and maintained artificially by the government. This rate will not fluctuate intraday, and may be reset on particular dates known as revaluation dates. Governments of emerging market countries often do this to create stability in the value of their currencies. In order to keep the pegged foreign exchange rate stable, the government of the country must hold large reserves of the currency to which its currency is pegged in order to control changes in supply and demand.
How does a typical Malawi Kwacha depreciation or appreciation occur for example? While it may seem a complex process and in fact it is to some extent, but it’s not much different from how the prices of your tomatoes are determined.
While it may seem immature to compare currency movements with the prices of tomatoes, the most important factor determining their price is the same – market forces of demand and supply.
The Mw kwacha/dollar rate is a two-way rate which means that the price of 1 dollar is quoted in terms of how much kwacha it takes to buy one dollar. The value of one currency against another is based on the demand of the currency. If the demand for
Floating rates are determined by the market forces of supply and demand. How much demand there is in relation to supply of a currency will determine that currency 's value in relation to another currency. For example, if the demand for U.S. dollars by Europeans increases, the supply-demand relationship will cause an increase in price of the U.S. dollar in relation to the euro. There are countless geopolitical and economic announcements that affect the exchange rates between two countries, but a few of the most popular include: interest rate decisions, unemployment rates, inflation reports, gross domestic product numbers and manufacturing information. (Levich, 2001)
Some countries may decide to use a pegged exchange rate that is set and maintained artificially by the government. This rate will not fluctuate intraday, and may be reset on particular dates known as revaluation dates. Governments of emerging market countries often do this to create stability in the value of their currencies. In order to keep the pegged foreign exchange rate stable, the government of the country must hold large reserves of the currency to which its currency is pegged in order to control changes in supply and demand.
How does a typical Malawi Kwacha depreciation or appreciation occur for example? While it may seem a complex process and in fact it is to some extent, but it’s not much different from how the prices of your tomatoes are determined.
While it may seem immature to compare currency movements with the prices of tomatoes, the most important factor determining their price is the same – market forces of demand and supply.
The Mw kwacha/dollar rate is a two-way rate which means that the price of 1 dollar is quoted in terms of how much kwacha it takes to buy one dollar. The value of one currency against another is based on the demand of the currency. If the demand for
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