Question

Give any two factors which influence foreign exchange rate.

Give factors which influence rate of exchange.

Answer 1

1. Trade Conditions: The demand and supply of foreign currencies are affected by a country’s level of imports and exports. When a country exports more than it imports, the demand for its currency increases in the foreign exchange market, causing the exchange rate to move in its favour. On the other hand, if imports are greater than exports, the demand for its currency decreases, leading to a less favourable exchange rate. Therefore, trade performance plays a key role in determining the exchange rate.
2. Sale and purchase of stocks, shares and securities: When people in a country purchase stocks, shares, or securities from abroad, the demand for foreign currencies increases because payments must be made in those currencies. This causes the exchange rate to shift against the domestic currency and in favour of the foreign currencies. Conversely, if foreign investors buy such financial assets from our country, the exchange rate moves in favour of our currency and against foreign currencies.