The Formation of Monetary and Foreign Exchange Markets

The causes and factors causing instability in the exchange rate:

Reasons or factors, currency fluctuations, first, is purchasing the property of the national currency and the state of supply and demand for it.

In the spontaneous development of international trade and other forms of foreign economic relations of the ratio of receipts and payments in foreign currency, and hence the demand and supply of foreign currency is never in equilibrium. With the active balance of payments, when payments exceed the foreign exchange earnings, foreign exchange rates in the local currency market are falling, and the rate of national currency rises. The reverse happens when the country will have a passive balance of payments. Thus, the exchange rate at any given moment depends on the current account balance.

Second, the change in the exchange rate is influenced by the degree of depreciation of money, the decline of their purchasing power in the country. The higher inflation rate in the country, the greater the depreciation of its currency, ceteris paribus.

Among other factors that influence the exchange rate change, we note the level (the difference between the levels), interest rates, the size of reserves, the degree of individual national currencies in international credit and settlement of payment transactions, acting on exchange rates through the migration of short-term capital.

The exchange rate is formed mainly influenced by:

• The relations of demand and supply of currency, which is determined by many factors. The dynamics of the exchange rate determines the individual states influence the competitiveness of its products on world markets, a change which ultimately caused the level of technology and production techniques;

• Interest rates;

• The relationships of inflation. The higher the inflation rate, the lower the rate of its currency;

• Acceleration or delay in international payments;

• Status of national financial markets;

• The degree of use of certain currencies in international transactions;

• States, since the exchange rate is subject to regulation;

• Currency restrictions, that is, a set of measures aimed at restricting transactions with currency, gold and other currency values.

Thus, the formation of the exchange rate - a complex multifactorial process caused by interconnection of national and world economy and politics.