2. Factors That Influence Exchange Rates
Floating prices depend on supply and demand market forces. The demand for a currency will decide the value of the currency compared to other currencies. For example, the supply and demand relation would result in a rise in the US dollar price about the euro, if demand for US dollars by Europeans rises. There are various geopolitical and economic communications affecting the two countries’ exchange rates, but some of the most common ones include adjustments in interest rates, unemployment rates, inflation reports, domestic gross product figures, output data, and commodities.
Short-term moves in a floating exchange rate currency reflect speculation, rumors, disasters, and everyday supply and demand for the currency. If supply outstrips demand that currency will fall, and if demand outstrips supply that currency will rise. Extreme short-term moves can result in intervention by central banks, even in a floating rate environment. Because of this, while most major global currencies are considered floating, central banks and governments may step in if a nation’s currency becomes too high or too low.
A currency that is too high or too low could affect the nation’s economy negatively, affecting trade and the ability to pay debts. The government or central bank will attempt to implement measures to move their currency to a more favorable price.