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What are the factors that Affect the Supply and Demand of Foreign Currency?

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1. Trade conditions
The exchange rate is determined by the balance of payment. A country facing a deficit in her balance of payment finds the demand for foreign exchange exceeding its supply and the exchange rate moving against her. A country with a surplus in her balance of payment finds the supply of foreign exceeding demand, the price of the local currency raises above par i.e. it exchanges at a premium.

2. Stock Exchange Influences
These include investment and speculation in international securities and the grant of loan by one country to another. Loans by Britain to Kenya or the purchase by Britons of securities on the Nairobi Stock Exchange would give Kenyans the right to withdraw funds from London. This will increase the claims against Britain and deflate the value of British currency in Kenyan shilling. The payment of interest on loans made by British and the investment by other nations in British securities would increase British claims on other nations and thus increasing the value of British currency.

3. Banking Influences
This includes investment by banks in other countries. Banks also issue of Letter of Credit and their arbitrage operations involving the buying and selling of foreign currency with a view to making profit later on. These days banks issue travelers cheques, letters of credit etc., these increase foreigners claim on the country of issue and to that extend influence
the exchange rates against it.

4. Speculative Influences
Speculative influences are the outcome of the purchases and sale of foreign currencies by speculators in the expectations of a rise or fall in their value with a view to making profit. The action of speculators influence exchange rates

5. Currency Condition
Foreigners judge the value of a currency in terms of its purchasing power as indicated by the general price level. The greater the purchasing power of the currency unit, the higher the price they are willing to pay for it. Inflation lowers the purchasing power of the currency unit and moves the exchange against the inflated currency.

Wilfykil answered the question on March 9, 2019 at 08:18

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What are the factors that Affect the Supply and Demand of Foreign Currency?

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