Define Rate of Exchange and describe the factors influencing the exchange rate.

Define Rate of Exchange and describe the factors influencing the exchange rate.
The term foreign exchange refers to fund available for use in international transactions and may include foreign currency, deposits in foreign banks, and other liquid, short term financial claims payable in foreign currencies.

FACTORS OF EXCHANGE RATE The following parameters play a vital role in the fixation of exchange.

1- BUSINESS CONDITION If business conditions are poor, the rate of exchange will fall. Business conditions are the result of production, business cycle, employment, balance of payment, balance of trade, inflation, and government policies.

2- INFLUENCE OF STOCK EXCHANGE The stock exchange is the indeed of a country’s economy inflow of foreign currency on the stock exchange, that is, foreign buying of shares and securities pushes the foreign exchange rate high.

3- BANK INFLUENCE Bank rate also affects the rate of exchange. The rate is the ratio at which a central bank rediscounts bills of exchange presented by Commercial Banks. High bank rate may attract foreign exchange throwing a good impact on the exchange rate.

4- CURRENCY POSITION If currency notes are over-issued the inflow of foreign investment will stop. Consequently, the demand for local currency will fall resulting in the drop of the exchange rate. Deficit financing and subsidies also weaken the currency.

5- ROLE OF WORLD BANK Monetary systems all over the world have fallen under the purview of the World Bank and International Monetary Funds (IMF). All borrowing countries follow the dictates of the IMF in the determination of the exchange rate for their currencies and other monetary policies.

6- SPECULATION Speculation buying of a currency may indicate the possibility of the increase in its value compared with other currencies. Speculative buying of goods, on the other hand, portends the expected fall in the value of a country’s currency.

7- FOREIGN LOANS Foreign loans go a way in strengthening local way in strengthening local currency. However, if these loans are not properly utilized and spent on non development work the local currency doesn’t become strong and the government finds it self in a difficult situation when the due date for the repayment of the loans falls.

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