3 Factors that affect the value of a currency.docx - 3 Factors that affect the value of a currency Supply vs demand of a currency Sentiment and market

3 Factors that affect the value of a currency.docx - 3...

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3 Factors that affect the value of a currency. Supply vs demand of a currency Sentiment and market psychology Tehnical factors 1. Supply vs demand of a currency When country x exports products or services, it creates a demand for products because the customers need to pay for those products or services in the country’s currency. Therefore they will have to convert their home currency to the exporter’s currency. Which increases the demand for the currency, and the value of the currency appreciates. In addition, government or large American corporations issue bonds to raise capital, and if these bonds are bought by foreigners then again the bonds have to be paid for in the country x’s currency, and the foreign customer will have to sell their local currency to buy country x’s currency so they can make payment. Also, if there is strong growth in country x’s economy, and companies are expanding their earnings then the desire by foreigners to own corporate stocks in the country also requires that they sell their currency to buy the exchanged currency to pay for the purchase of stocks. 2. Sentiment and market psychology But what if country x weakens and consumption slows due to increasing unemployment? Then country x is confronted with the possibility that foreigners may sell their bonds or stocks and return the cash from the sale in order to return to their local currency. Hence they sell the dollars and buy back their local currency.
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  • Spring '16
  • Prof Ivan
  • United States dollar, Pound sterling

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