We are all aware of the Rupee Dollar crisis which is currently going and the value of the Rupee has been steeply declining against the dollar. In all this hustle bustle and noise we normally tend to overlook the main reasons behind the fluctuations of Rupee Dollar ratio.
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How is Exchange Rate Determined?
For many people it is a mystery as to how are the exchange rates of currencies determined and especially who decides how will be the value of a dollar against the rupee and so forth. Well the very simple answer to this question is that like any or most of the market commodities, the rate of the dollar against the rupee is determined by the market forces namely the supply and demand factor.
So although the exact economics and techniques behind such evaluation are little bit complicated, this should be a sufficient explanation for broad purposes. Suppose if a country and surplus dollar reserves as compared to its requirements, then the value of the dollar will be more and vice verca.
The exact reasons for demand of the dollar could be varied and some of them are as follows.
Psychology: often known more closely as the market sentiment, it is a factor which decides whether majority of the people are keeping their monies in the country or in other nations in anticipation of some errors, or not.
Another closely related factor which pertains to psychology is speculation which could introduce panic or relief in the market and the associated activities effecting the dollar.
International Trade: goods can either be exported or imported in a country. If the goods are sent abroad it leads to earning of foreign exchange while it is the other way round for imports. Hence the amount of trade as to the volumes of import and export determine rate of dollar to certain extent.
Of course there could be a plethora of other factors and the entire gamut of currency rates is not as simple as it seems at the outset, yet these points would have cleared your doubts on this issue.
