In general, a country’s exchange rate is affected by the law of supply and demand for that country’s currency in international exchange markets. Floating exchange rate has great influences affecting foreign exchange rates.
If demand for dollars exceeds in supply, then the value of the dollar will go up. However, if the supply of dollars exceeds in demand, then the value will go down eventually.
Supply and demand of the currency is one determining factor that influences the exchange amount. Likewise, the inflation levels in a country have influences affecting foreign exchange rates.
If the level is high, then the currency will be debased because foreign investors will be less likely to invest in a currency that has a high level of inflation. This will not give them a good return over time.
It is necessary that the nation’s treasury develops the right trade balance to remain strong, in terms of currency. The economy will be in a good position when the prices for exported products are higher than what the same country is importing, then and the currency will remain strong. This will result to more foreign investors.
They will initiate more procurement with that country’s currency and the economy will come along. These are some factors that have great influences affecting foreign exchange rates of a certain country.
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