Forex markets, exchange rate determination

1. -Apurv Verma

2. 1. How is the value of a currency
determined? The factors which determine
currency value.
2. Forex Rate or the FX Rate.

3.  How do we actually evaluate the value of money? It is a
simple question but with possibly complex answers. Is it the
value we see? and moreover this value is never constant.
 Both domestic and international forces exert their influence on
the value of a currency.
 What determines the value of a countries currency really
comes down to supply and demand of that currency. If a
particular countries currency is in high demand by purchasers
such as travelers, governments, and investors, this will
increase the value of the countries currency. The factors that
follow may have a positive or negative affect on the demand
for a particular currency. Lets take a look at these factors.

4.  If a country prints an excessive amount of currency, more
then what it normally would, this can decrease the value
of the currency. Any time you have more of anything, this
can result in a decrease in it's value. This is true whether
you are talking about currency or commodities such as
iron ore, crude oil, coal, gold, silver and platinum. A large
amount of currency in circulation can lower the value of a
currency. A small amount of currency in circulation can
result in the value of the currency increasing.

5.  If a countries economy is not doing well, this can decrease the
demand for that countries currency. Specifically, here we are
talking about the degree of unemployment, degree of
consumer spending, and extent of business expansion that is
taking place in a country. High unemployment, decrease
consumer spending, with a decrease in business expansion,
means a poor economy and a decrease in currency value.
 The potential for economic growth in a country should also be
looked at. If the potential is strong, then it's currency value
would expect to increase. Also, if a country produces products
that other countries want to buy, this can increase the value of
that countries currency

6.  Related to the economy, is the prices of
foreign goods. If a foreign company sells
goods in a country which are cheaper then
comparable products produced in that
country, this can hurt the economy of that
country. A poor economy results in a
decrease in demand for that countries
currency, which lowers it's value.

7.  To what degree does political corruption
exist within a country? To what degree do
political affairs have on the economy of
that country? A country which is known to
have corrupt politicians, can result in a
lowering of the value of it's currency.

8. A country which operates at a high level of
secrecy, at least as observed by those
outside the country, can result in a
lowering of the value of their currency.
Another words, if not much is known about
a country due to a restriction of media
expression within that country, this can
lower the value of it's currency.

9.  To what degree are politicians addressing
a national debt problem? Are politicians
causing an increase in the national debt?
In a democratic society, national debt must
be paid by the taxpayer. If taxes increase,
this results in a lowering of the purchasing
capability of society, which results in a
disruptive affect on the economy. In this
case, currency value will decrease.

10.  Ifa president is popular, this can increase
the demand for a currency. If the
presidents popularity is dropping, due to
unpopular government policies, this may
result in a decrease in demand for a
currency and a subsequent lowering of it's
value.

11. A terrorists attack can increase the
probability of a war. A war or the strong
potential for a war can decrease the
demand for a currency, simply because a
war drains the economy. Wars are
expensive and must be paid by the
taxpayer. You simply can not have a
growing economy during war time. So war
lowers the value of a currency.

12.  Isgovernment growing and expanding too
much? New growth by developing
departments, and creating unnecessary
programs, all costs money. Again, the
taxpayer will need to pay for the new
growth, which for the long run has a
negative affect on the economy. Excess
government growth can lower the value of
a countries currency.

13.  Taxcuts can stimulate the economy, as long
as the consumer spends the extra money he
or she may have. But also, tax cuts which are
too large can result in high demand for
products, which may raise prices, which can
lead to inflation and the desire to purchase
cheaper foreign products. But in general, tax
cuts historically have been good for the
economy, which can result in an increase
demand for that countries currency.

14.  Rupee appreciated significantly in 2006 –
2007 and the above mentioned were the
reasons for the Rupee appreciation since
India had stable government with favorable
economic climate. USA and other multi-
national companies started investing in
India and they bought more Indian Rupees
and the demand for rupee increased which
in turn appreciated the rupee value.

15.  Infinance, the exchange rates (also known
as the foreign-exchange rate, forex rate or
FX rate) between two currencies specifies
how much one currency is worth in terms of
the other. It is the value of a foreign nation’s
currency in terms of the home nation’s
currency. For example an exchange rate of
91 Japanese yen (JPY, ¥) to the United
States dollar (USD, $) means that JPY 91 is
worth the same as USD 1

17. Strong dollar reduces the export value of US Companies and
likewise strong rupee reduces the export value of Indian
companies.
Assume ABC had agreed to supply 10 inners to Macy’s in US @
$100 per piece in 2004 when the Rupee value against the
dollar was 46. ABC would have earned Rs.46000 in 2004 by
supplying 10 inners. But suddenly the Rupee value increased
and in 2007 Rupee value was 40 against a US Dollar (You are
able to buy 1 dollar by giving Rs.40 instead of Rs.46). ABC
would now earn just Rs.40000 for supplying the same 10
inners and it gets affected by reduced revenues.

18.  Forex Trading is trading currencies from
different countries against each other. Forex
is acronym of Foreign Exchange.
 For example, in Europe the currency in
circulation is called the Euro (EUR) and in the
United States the currency in circulation is
called the US Dollar (USD). An example of a
forex trade is to buy the Euro while
simultaneously selling US Dollar. This is
called going long on the EUR/USD.

19.  Forex trading is typically done through a
broker or market maker. As a forex trader you
can choose a currency pair that you expect to
change in value and place a trade
accordingly. For example, if you had
purchased 1,000 Euros in January of 2005, it
would have cost you around $1,200 USD.
Throughout 2005 the Euro’s value vs. the
U.S. Dollar’s value increased. At the end of
the year 1,000 Euros was worth $1,300 U.S.
Dollars. If you had chosen to end your trade
at that point, you would have a $100 gain.

20.  Stock Analysis Online
 Wikipedia
 July 8, 2005 issue of Executive Intelligence
Review.