Describe The Fluctuation In The Rate Of Exchange.

Following are the main causes that may lead to fluctuations in the rate of exchange above or below this equilibrium level.

1. Trade Conditions: Trade affect exports and imports and hence the supply of and demand for foreign currency respectively. When our exports are greater than imports, exchange rate will tend to move in our favor, and then in opposite case it will tend to move against us. Exports and imports here include not only visible but also invisible items.
2. Stock Exchange Influences: These include payments of loans, interest and repayment of loan, purchase and sale of foreign securities etc. when the loan is given by the home country to the foreign country, the demand for foreign currency increases and the value of home currency tends to fall.

The same is the case when the home investors purchase foreign securities or foreign investors sell home securities. The exchange move in the favor of a country when its loan are being repaid or when foreigners buy her securities, because such transactions create demand for the home currency.

3. Speculative Influences: The rate of exchange is also influenced by speculation in foreign exchange. The speculators buy and sell foreign exchange with a view to making profit such operations are called Arbitrage operations. The operations add either to demand for or supply of foreign exchange and thus bring about change in rate of exchange.

4. Political Conditions: If there is political stability in the country the relations between laborers and mill owners are cordial and will attracts foreign capital which moves exchange rate in her favor. If there is no political stability, internal disturbance and danger of nationalization of private property tend to lower the external value of country's currency.

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