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In a floating exchange rate environment, how is the value of a currency determined? What factors...

In a floating exchange rate environment, how is the value of a currency determined? What factors affect the value of the currency?

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Answer #1

Under the floating exchange rate, the value of a currency is determined by equating the demand and supply of currency in the world market. The intersection of demand curve for domestic currency in the world market and supply curve of domestic currency in the world market determine the value of the currency,

Following are the factors that can affect the value of a currency:

1. The growth rate of the economy.

2. The interest rate in the economy.

3. Current and expected inflation rate.

4. Speculation

5. Government policies

6. Market fluctuations

7. Political Stability.

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