Buy essay on 2. Discuss the factors influencing exchange rates and assess the relative merits of a weak currency.

Exchange rate is an important element of international monetary relations, it represents the ratio between the monetary units of discord, determined by their purchasing power and a number of other actors. Exchange rate is necessary for the international monetary, credit and settlement of financial transactions.
Exchange rate – the ratio for exchange of two currencies on the foreign exchange market, are formed depending on supply and demand of a currency, as well as a number of other factors.
Exchange rate is the price of the national currency, denominated in foreign currency. Exchange rate has great influence on exchange operations, international trade and investment – in short, everything that connects the national economy with the global market. Exchange rate is central to monetary policy: it can be used as targets, a policy tool, or just an economic indicator. The role of the exchange rate is largely determined by the type of the selected monetary policy.
There is a classification of the currency to “weak” and “strong”. It is about the relationship of the exchange rate and currency of the foreign exchange market. Moreover, these terms are often applied to currencies that are anything but weak at the international level. Thus, traditionally, in the European Union “strong” currencies are: Germanic mark, British pound, Swiss franc, Dutch guilder, and the “weak” are: the French franc, Italian lira, Belgian franc. The global currency market classify rates is somewhat different way: a “strong” currencies are the U.S. dollar and Japanese yen, and all other currencies in relation to them are considered as “weak.”
Weak Currency is good for nations which have a larger share of export than imports making up their GDP, an example of this is Japan, which relies heavily on it’s exports, and having a weaker relative currency encourages more nations to buy their goods. Strong Currency is good for nations which rely on imports, examples of this are the U.K. and the United States in which their stronger relative currency allows for less of their currency to purchase more from countries with a weaker currency. ( Taking Advantage Of A Weak U.S. Dollar).
At certain periods, and “strong” currency may become “weak” in relation to well-known “weak” currencies. Thus, lowering the U.S. dollar compared to the French franc, the dollar is said to be “weak”.
Weak currency promotes the growth of exports and a decline in imports, which stimulates the development of economies with a currency.
Like any price, exchange rate deviates from it’s value – the purchasing power of currencies – because of the fluctuations of supply and demand of currencies. Several factors influence value of the supply and demand, and complex of the exchange rate reflects its relationship with cost, price, money, interest, balance of payments, and other economic values. Among the main factors are the following:
1. The rate of inflation. The rate of inflation affects the exchange rate: the higher is the rate of inflation in the country, the lower is the rate of its currency, if not counteract with other factors.
Inflationary depreciation of money in the country causes a decrease in purchasing power, and causes a decrease of rate to the currencies of countries with lower inflation rate. This trend is usually observed in the medium and long term. Alignment of the exchange rate, bringing it in line with purchasing power parity, occur on average within two years. This can be explained in terms of the fact that the daily fluctuation of exchange rates are not adjusted to their purchaser translational ability, as well as influenced by the other factors. (Isard, Peter 1995)
2. The balance of payments. Surplus balance contributes to the national currency rate, if increased demand for it by foreign debtors. Unfavorable balance of payments generates a downward trend in the national currency, because debtors in order to repay their external obligations usually sell national currency for foreign currency. The instability of the balance of payments leads to an abrupt change in the supply and demand in the relevant currency. Nowadays has increased dramatically the impact of international capital movements on the balance of payments and, consequently, on the exchange rate.
3. The difference in interest rates of different countries. There are 2 aspects of the influence of this factor. First, changes in interest rates in the country affects other things being equal on the international movement of capitals, primarily short-term. In principle, the increase of deterioration of interest rate stimulates the incomings of foreign capital, and its reduction promotes flow of capital, including national, abroad. The movement of capital, especially of speculative “hot” money, can lead to instability of balance of payments. Secondly, the operation of the loan market and of foreign exchange markets are highly effected by changes in the interest rates.
4. The use of certain currencies in the Euromarket and in international payments. For example, the fact that 60% of EBRD operations are carried out in dollars, determines the extend of supply and demand for that currency. At the exchange rate affects the degree of its use in international payments.
5. The degree of confidence in the currency at the national and international markets. It depends on the state economy and political situation in the country, as well as discussed above factors influencing the exchange rate. And dealers always consider the data about the rate of economic growth, as well as about inflation, the level of purchasing power parity, demand and supply of currency, but also the dynamics of the changes in perspective.
6. Monetary policy. The exchange rate on foreign exchange markets is formed on the basis of the supply and demand mechanism, and fluctuations in exchange relations usually occur. In the market develops real exchange rate – an indicator of the economy, monetary, finance, credit and credibility of a particular currency. State regulation of exchange rate is aimed at its improvement or decline on the basis of the objectives of monetary and economic policy. To this end, a defined monetary policy is held in the country.
Thus, the formation of the exchange rate – a complex multifactorial process, caused by the interplay of national and world economy and politics. So when forecasting the exchange rate into account the factors considered and their effect on the ratio of rates depending on the specific situation.

 
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