XII Banking - Question 24 - Fluctuation in Rate of Exchange

Q.24. What are the causes of fluctuation in the rate of exchange of a country?

The rate of exchange fluctuates in the market due to interplay of demand and supply of currency of a particular country. This is the result of some of the following transactions.


BALANCE OF TRADE

The main reason for fluctuations in the rate of exchange of the currency is the value of imports and exports of a country. If the value of imports exceeds the value of exports the rate of exchange will lend downwards and vice versa.


FOREIGN INVESTMENT

Foreign capital investment in a country necessities the payment of dividends or interest to the investing countries. If the capital absorbing country is not in a position to pay such claims in foreign currency, the rate of exchange of that country will definitely fall down.


SERVICE CHARGES

Freight and Insurance expenses also fluctuates the rate of exchange of a country. If the importing country does not have her own shipping companies the transportation charges are to be paid to foreign ships. So the insurance premium in case is to be paid to foreign companies. This creates a demand of foreign currency and if the supply is limited the rate of exchange will fall.