What influences the change in the exchange rate?

 

What influences the change in the exchange rate?

 

Many will be able to explain what the exchange rate is. People worry when the ruble exchange rate starts to fall, and rejoice when it grows. But what factors affect the exchange rate, not everyone knows. Let's figure it out together.

Supply and demand

In any market, including the foreign exchange, the forces of supply and demand operate - this is one of the reasons on which the exchange rate of currencies depends. If the demand for the product is excellent and there is always a long line at the counter, the seller starts to raise the price little by little. This is the case when the supply does not cover the demand.

The price will go up until buyers realize that it is unprofitable to purchase goods at such a price. The line is slowly thinning, and the seller understands that it is impossible to further increase the price. There is no longer any excitement, and the price has remained constant - supply and demand have been balanced.

But the situation is different: the market is filled with the same product at a high price, and there are very few potential buyers. Here the supply is much greater than the demand, so there are all conditions for reducing the price. One of the sellers decides to lower the price. Immediately, people begin to gather near his counter. Competitors see what is happening, and some of the lower the price even lower. The struggle to increase sales begins. Prices will decline until traders realize that further price declines will result in losses.

Currency is also a commodity: it is constantly bought and sold for another currency. When the amount of the national currency in a country falls sharply, its rate begins to rise. If a country is oversaturated with its own currency, its price begins to fall. In addition, the excessive amount of money in the country leads to their depreciation (inflation).

Influence of central banks on the exchange rate of the national currency

Supply and demand can inflate prices or push them to the very bottom, so the exchange rate is closely monitored by central banks - the structures of financial power in countries. They can artificially keep the price of a currency, help it rise or fall.

How do they set the exchange rate of the central bank? Directly - nothing. They very closely monitor all social and economic processes in the country in order to keep the exchange rate balanced. If there is a threat of inflation, the central bank raises the interest rate, which makes the currency more expensive. A currency that is growing in value attracts investors - this gives an additional impetus to the growth of the rate.

If the economic activity in the country is too low, the central bank begins to lower the interest rate in order to make money more affordable for business and the population, thereby stimulating the economy. The low-interest-rate makes it possible to take out inexpensive loans, pouring more and more money into circulation and further reducing their price.

By studying macroeconomic events, one can trace how the exchange rate is formed.

In addition to the interest rate, central banks have several other levers of influence on the national currency.

            Launching the printing press (or issuing money). To reduce the rate of its own currency, the central bank begins to increase its volume, thereby closing demand and stimulating the economy;

 

            Foreign exchange intervention. When it is necessary to quickly raise or weaken the rate of the native currency, the central bank begins to work in the foreign exchange market, buying or selling huge amounts of foreign currencies at a time.

Unexpected events

Sometimes the central bank can't do anything about the price. This may be due to various unexpected factors affecting the exchange rate.

            Political crisis. In 2014, the events that unfolded in Ukraine collapsed the hryvnia against the dollar from 8.23 ​​to 9.05 per dollar;

 

            Technogenic disasters. The strongest earthquake and tsunami that occurred on March 11, 2011, in Japan, provoked an accident at the Fukushima-1 nuclear power plant. The events led to the strengthening of the Japanese yen. Yes, sometimes destructive events can have a positive effect on the currency (Japanese investors began to get rid of assets, converting them into yen, which caused the deficit and further growth of the currency);

 

            Military action and terrorist acts. Indicative in this sense was the day of September 11, 2001, when not only stock indices collapsed in the United States due to the attack on the World Trade Center and the Pentagon. The dollar fell heavily against other currencies.

 

Even the behavior of officials, police actions, or civil protests can cause the national currency to rise or fall - in many cases this process is unpredictable.

Investors who are well versed in the monetary policy of states, know what conditions affect the exchange rate, and are able to analyze macroeconomic news, can not only keep their savings in a strong and stable currency but also make money on exchange rate fluctuations.

 

#Joseph Marc Blumenthal

 

 

 

 

Comments

Popular posts from this blog

Reasons for the deficit and rising inflation

Abby Joseph-Cohen

Evergrande founder sold $1.1 billion of his real estate and art collection to pay off the company's