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How is the price of currency Determined

Trading in currencies

Before getting into the currency trade,you must know about the factors that determine the price of a currency.

The Forex marketis a massive market and the free flow of finances contributes to the appreciation and the depreciation in the foreign exchange market. There are many online trading courses that help to understand the basics and advanced level currency trading equipping you with some pointers to start-off.Currency trading strategies can also be planned while keeping in mind what affects the price of the currency:

The price of currency is determined on various factors

Demand and supply: If the demand for the currency were to increase the exchange rate will go higher as well. For example, in the 2012 London Olympics when tourism to the UK increased their currency appreciated by over 20% in a short period of time. The behavior here is just like any other good, dictated by supply and demand

Market and situational sentiments: During cyclonic situations in the market, investors usually keep their money safe by keeping them in US treasuries, Swiss Franc, gold and so on to avoid losses to their portfolios. This would lead to foreign investors redeeming their investments from India. This in further could increase the demand for dollar vis-à-vis Indian rupees.

Speculation: When speculators sense improvements or downfall they too want to benefit from such rising or falling dollar and that's when they start selling or buying dollar which further changes the demand of the dollar.

RBI intervention: The RBI buys dollars when rupee appreciates over acceptable limits and sells dollars when rupee depreciates. The RBI does so to avoid the volatility in the rupee –dollar rates.

Imports and exports: Importers are burdened with taxes and other situations for which the government incentivizes exports. Importing items would make us pay in dollars which in turn strengthens dollar's demand. Export does the exact opposite.

Interest rates: The only way in which money would pour into India and provide us with the supply of dollars is when government interest rates attract foreign capital to India and encourages foreign exchange trading.

Public debt/fiscal policy: Currency fluctuates due to the government's failed attempts at matching expenses with equivalent revenues which cause a shortage of funds in the currency trade. Then the government opts to borrow money from the World Bank and the IMF which in turn accrues interests, leading to currency fluctuations again.