The value of a currency against another is based on demand. Greater demand makes a currency stronger and vice versa. When there is a good inflow of dollars in India, the value of dollar will go down and value of Rupees will go up, because Rupees will be required to convert all dollars.
However, there are many determinants of the exchange rates of a particular currency against another currency. If these determinant factors are favorable to a country, there is a possibility that value of that country’s currency will rise.
Some of these determinants are:
However, there are many determinants of the exchange rates of a particular currency against another currency. If these determinant factors are favorable to a country, there is a possibility that value of that country’s currency will rise.
Some of these determinants are:
- International Parity Conditions
- Balance of Payments
- Economic Policies of a government (Fiscal Policy, Budget, Investment policy and Foreign Trade Policies) and a country’s central Bank (Cost of money, interest rates, monetary policy)
- General macroeconomic conditions of the country
- Inflation levels and trends
- Balance of Trade
- Market Psychology & perception
- General political stability
There are two types of exchange rate regimes. One is fixed exchange rate regime where the exchange rates are decided by the government. Another is floating exchange rate regime (an example is China, but now the Chinese leaders say that it will switch to Floating Rate regime very soon). In most countries Floating Exchange Rate regime prevails. In floating exchange rate regime, the combined forces of the market and the above determinants decide the exchange rate.
The International parity conditions also include interest rate parity, Domestic fisher effect and international fisher effect.
The balance of trade affects the rates indicating a demand for a currency. Trade surplus may have a positive impact and trade deficit may have a negative impact on country’s currency. Inflation weakens the domestic currency. (However, in certain situations the inflation may lead to strengthening of the currency in anticipation of moves of central bank to hike the interest rates). The Economic viability and productivity of a country positively influences the value of its currency. Further, Internal, regional, and international political conditions and events have a profound effect on international currency markets. Market Psychology & market perception also have profound impact on Currency rates
How the dollar value is determined against indian rupee..what are the factors influencing it..?
Theorotically supply and demand fixes the value of dollar. In the market if dollars are more and rupees are less automaticaly dollar goes down.
But in practical since last five to six years Indian governament involves in setting dollar value. As on January 18th of 2008 India has 285 billion dollars as forex. Means India has 285 billions of US dollars of foreign currency in current account, which it can use to import goods. As on today India is the 4th largest foreign currency holder in the world. Out of this 285 about 65% are US dollars.
Now if India wants to increase its rupee value it can bring all US dollar holdings in the market to exhange with other currencies. If so US dollar falls suddenly to may be 20 Rs. If dollar falls India can make more money with its exports. But in real India or any other country dont want to do this. Because if dollar falls down. India will get less money for its forex holdings of 285 billion dollars. In addition in future it cannot export any goods to US as US dollar is so cheap indians cannot sell goods so cheap for export. ( no one is intersted to sell their products for half rate) And call centres cannot pay salaries to their employers, so India has to stop call centres and this is loss of job and export. Like wise Indian softwear companies cannot export goods to US for so cheap rate. So the result will be India will go for slow down. Stops booming. People lose jobs. So India want to keep dollar value wel in position so that Indians can export goods to US. Now US dollar is falling with respect to euro.
But this manupulated things cannot last forever. One day reality comes to surface, Because now India is loosing money by fixing its Rs with dollar. Because oil price is going high indians has to buy raw materials in the world for more money and sell them for less. This does't work for long time.
Now US is going for recession because if its increased imports and decreased exports which created 9 trillion dollars of foreign debt. Along with US India will also enter in recession as Indian economy is now depending on US. Whole world is entering in recession. But for India its a short term recession but for US it may take decades to come up. On that time nobody knows who will be super power.
For any information please go to the following link its knowledge bank and is free.Wikipedia.
But in practical since last five to six years Indian governament involves in setting dollar value. As on January 18th of 2008 India has 285 billion dollars as forex. Means India has 285 billions of US dollars of foreign currency in current account, which it can use to import goods. As on today India is the 4th largest foreign currency holder in the world. Out of this 285 about 65% are US dollars.
Now if India wants to increase its rupee value it can bring all US dollar holdings in the market to exhange with other currencies. If so US dollar falls suddenly to may be 20 Rs. If dollar falls India can make more money with its exports. But in real India or any other country dont want to do this. Because if dollar falls down. India will get less money for its forex holdings of 285 billion dollars. In addition in future it cannot export any goods to US as US dollar is so cheap indians cannot sell goods so cheap for export. ( no one is intersted to sell their products for half rate) And call centres cannot pay salaries to their employers, so India has to stop call centres and this is loss of job and export. Like wise Indian softwear companies cannot export goods to US for so cheap rate. So the result will be India will go for slow down. Stops booming. People lose jobs. So India want to keep dollar value wel in position so that Indians can export goods to US. Now US dollar is falling with respect to euro.
But this manupulated things cannot last forever. One day reality comes to surface, Because now India is loosing money by fixing its Rs with dollar. Because oil price is going high indians has to buy raw materials in the world for more money and sell them for less. This does't work for long time.
Now US is going for recession because if its increased imports and decreased exports which created 9 trillion dollars of foreign debt. Along with US India will also enter in recession as Indian economy is now depending on US. Whole world is entering in recession. But for India its a short term recession but for US it may take decades to come up. On that time nobody knows who will be super power.
For any information please go to the following link its knowledge bank and is free.Wikipedia.
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