1 / The difference in inflation between the two countries would affect the exchange rate
according to purchasing power equilibrium theory, the exchange rate reflects compare the purchasing power of the domestic currency against the foreign currency or domestic prices and foreign prices. Therefore, when the difference between the two countries inflation changes, ie the price level changes in these two countries, the exchange rate between two currencies of two countries which will fluctuate.
If the high domestic inflation than foreign inflation, the purchasing power of the local currency fell against the foreign currency, the exchange rate tends to increase. Conversely, if the lower domestic inflation abroad inflation, the purchasing power of the domestic currency relative to foreign currencies and exchange rates reduced.
For example, before inflation, commodities A sale at US for $ 1, sold in Vietnam for 16,000 VND. The exchange rate of USD / VND was then 1 USD = 16,000 VND. Suppose that, in 2006, inflation in the US is 3%, 7% in Vietnam, the prices of commodities A moment changed. In the US, a commodity to be sold for $ 1 + $ 1 × 3% = $ 1.03. In Vietnam, the price of the commodity A by the impact of inflation at that time will be 16,000 VND + 7% × 16,000 VND = 17,120 VND. USD / VND from the impact of inflation is 1 USD = 17 120 / 1.03 = 16,621 VND. Thus, due to the positive inflation gap between Vietnam and the US, the exchange rate between the two currencies has increased. If we assume the opposite, ie the rate of inflation in the US is 7% and 3% in Vietnam, the rate will be reduced, less than $ 1 is equivalent to 16,000 VND.
2 / The difference between the interest rate countries
countries that higher short-term rates, the short-term capital inflows tend to flow to collect the difference due to the interest generated, thereby increasing supply of foreign exchange, foreign exchange reduced demand and exchange rates the exchange has a downward trend.
in order to determine a country's interest rate is high or low, usually people compare the interest rate of that country to the international interest rate loan interest rates on the interbank market London LIBID, international interest rates on the interbank market SIBID Singapore ...
it should be noted that the difference in interest rates that affect the volatility of the exchange rate, but it was just an indirect impact, not directly followed by, in many cases the interest rate is not the decisive factor to the movement of capital flows. The difference in interest rates to stabilize economic conditions, the new political attract short-term capital from outside into.
3 / shortage surplus in the international balance of payments
impact of this factor directly to foreign currency supply and demand relationship, through which an impact on the exchange rate. When the balance of payments bumper, under the impact of the law of supply and demand of foreign currency would make foreign currency devaluation, currency appreciation, the exchange rate fell. Conversely, when the international balance of payments deficit will make up the foreign currency rates, currency devaluation, the exchange rate to rise.
4 / Situation growth or recession
If other factors do not change the national income of a country increases compared with other countries, the demand for imported goods from other countries also increase leading to increased demand for foreign exchange. As a result the exchange rate will tend to increase.
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