HOW IT AFFECT IMPORTS AND EXPORTs

Let us take US for example. If the value of US dollar increases it can cause a lot troubles for
US companies which imports a great amount of goods to other countries. This is due to the
increase in the price of their export goods since their products are priced in US dollars which
will be expensive to other countries paying in currency other than US dollar.

However, the dollar's ideal conversion standard can likewise hurt U.S. firms at home. That is
on the grounds that when the dollar is solid, American purchasers can purchase imported
merchandise for less amount of dollars, making American-made items all the more expensive
in comparison. While this causes it to give the idea that U.S. organizations advantage when
the dollar debilitates, the truth isn't so basic. At the point when the dollar falls in worth
contrasted with different monetary forms, the cost of imported crude materials like steel go
up in cost and items like vehicles that are fabricated in the U.S. can cost more to make.
Alternately, if the dollar rises and the expense of imported materials drops, American makers
that hold their costs consistent will see their edges increment. Then again, they have the
choice of dropping their costs to get a greater lump of the market, without giving up any of
their benefits. Moves like this can make up at the loss of cost intensity because of a more
grounded dollar both at home and abroad.

REASONS WHY THEY FLUCTUATE

Foreign Exchange rate (ForEx rate) is one of the most significant methods through which a
nation's overall degree of financial health is resolved. A nation's Foreign exchange gives a
window to its economic stability, which is the reason it is continually watched and dissected.
On the off chance that you are considering sending or accepting cash from abroad, you have
to watch out for the money trade rates. The swapping scale is characterized as "the rate at
which one nation's currency might be changed over into another." It might fluctuate every
day with the changing business sector powers of market interest of monetary standards
starting with one nation then onto the next. Therefore; when sending or getting cash globally,
it is imperative to comprehend what decides trade rates.

Every country’s currency has different forces of demand and supply and Exchange rates
Fluctuate in accordance to response to this. For example, if we look at Chile, they are the
leading in export of copper in the world. So if the demand for copper increases on a global
scale, the currency of Chile, which is Pesos may rises because the companies that wants to
buy the copper will have to use pesos to buy the copper. Since there is a great demand for
copper already, the value of Pesos will rise when you compare it with other currencies of the
different countries like US dollar, pounds, Euros etc. and in the same manner, if the global
demand for copper falls, the value of pesos will also fall in respect to that. There are also
many other factors other than this. Here we will be talking about all the factors which cause
exchange rates to Fluctuate:

 INFLATION RATES:
Inflation is one of the major determinants of exchange rates. Change in
exchange rates of a currency is due to the changes in market inflation. When a
country has a lower inflation rate, there will be great rise in the value of its
currency. When inflation is low, there will be slow rate increase in the prices
of goods and services when a country has a low inflation rate it will see rise in
its currency while a country which has high inflation rate will see its currency
value decreasing and most of the time it will be accompanied by high interest
rates. This is because they can buy only few goods and services with their
currency.
For instance if we look at Australia, the higher the rate of inflammation
compared to other nations, there will be less competitive in its exports which
will result in selling less amount of exports depending on how elasticity the
export demand is. Due to this Australia currency will fall while the supply
rises as shown in the figure below
 Figure: Impact of higher inflation on the exchange rate

 INTEREST RATES:
Foreign exchange rates and inflation rates are closely related to interest rates.
Different interest rate between different countries affects the investments flow
between them which leads to affect in exchange rate.
INTEREST RATES
Interest rates are closely interrelated to foreign exchange rates and inflation
rates. If the rate which at which the nation is rising then when such nation
borrows from other then the rates also increase relatively. Hence this will
result in the country’s flock in higher returns and this in turn will result in
demand for such country’s currency and this will help the currency value to
rise up, therefore, if interest rates fall down then there will be higher returns
and the exchange rate of prevailing in that country will also fall down.

CURRENT ACCOUNT
A country’s balance of trade and the earnings of that country in foreign
investment are part of that country’s current account. In such current account,
the trade balance of the country shows the comparison between the import and
exports and foreign debts. If a country imports more than what it exports then
the country’s, may have a deficit in its current account. And this may result in
that country’s currency to fall.

GOVERNMENT DEBT
When a nation’s government issues a new debt, it has a lot of impact on that
nation, the interest rates of that nation may rise up and this may result in a
situation where in the bond buyers are interested towards that nation. But
however there will be a constant fear within the investors as the country has
taken too much debt and they fear the situation wherein the country defaults
such debt and due to this they’ll have to sell away the bonds that they hold and
due to this the exchange rates decline as there will be an undercutting demand
for that country’s currency. Thus, this effect of such situation will result in the
country’s inflation rate to rise up.

POLITICAL AND ECONOMIC STABILITY

This is one of the most essential factors, as the foreign capital of a country get
affected if the investments are safe and the business environment is certain.
Money will go to the country where there is stability overall like the
Predictability of the business climate however, it also flocks away from the
country it there is no certainty. This favours the exchange rate of some but
undermines the currency of other country.

BALANCE OF TRADE
A countries trade see a great improvement if the price of its exports rises at a
greater rate as compared to the price of its import. This will cause its revenue
to rise high which will result in higher demand for its currency and will
massively increase its country’s currency value. This will result in the rise of
exchange rate.
For instance, if there is a surplus in the balance of trade of Australia (X>M)
meaning that DAUS$ >SAUS$, this will result in the decrease of DAUS$. This will
be illustrated in the figure below.

Comparatively, a decrease in balance of trade will cause in net increase in

SAUS$ and will result in down pressure on the exchange rate. This is shown in
the figure below.
GOVERNMENT DEBT
When new debts are issued by the government, there is a rise in interest rates
for the purpose of attracting bond buyers. This leads to higher demands of its
currency. But if there is fear in the minds of the investors that too much debt
has been taken on by the government, they will not have any other choice than
sell whatever the government bonds they hold this will cut the demand for its
currency and cause its exchange rate to decline. This will result in the spike of
inflation.

At the point when a nation has a national debt, and most do, it needs to pay
enthusiasm on that debt and to reimburse the advances when they become due.
On the off chance that it has an excessive amount of obligation, the intrigue
and reimbursement weights become a major channel on the nation's incomes.
However there are a few ways which a country can respond to this situation.
1. Austerity programs
This means higher taxes and lower benefits. This is for the sole purpose of
repaying the country’s debt.

2. Print money to pay debt.

This depreciates the cash in light of the fact that there is a greater amount of it
out there than is expected to help the economy. On the world money advertise,
it is perceived that there is a lot of the nation's cash coasting around out there,
so individuals don't esteem it to such an extent. So imported merchandise and
products evaluated on the world market all cost more.

3. Default on the debt.

This is an indication of a nation that is in a difficult situation. Venezuela and
Greece are present models. When they default, no one needs to loan them any
more cash, so they need to pay generously higher enthusiasm on future
obligation, in this manner expanding the weight on their income. Or on the
other hand they should designate their obligation in the cash of some other
nation.