Structural factors include: 1) competitiveness of the country’s goods on the world market and its changes; 2) the state of the country’s balance of payments; 3) purchasing power of monetary units and inflation rates; 4) difference in interest rates in different countries; 5) state regulation of the exchange rate; 6) degree of openness of the economy.
Market factors are associated with fluctuations in business activity in the country, the political situation, rumors and forecasts. These include: 1) activity of foreign exchange markets; 2) speculative currency transactions; 3) crises, wars, natural disasters; 4) cyclical nature of business activity in the country.
Let's take a closer look at the mechanism of influence of some factors on the exchange rate: 1) Inflation rates and exchange rates. The exchange rate is affected by the rate of inflation. The higher the inflation rate in a country, the lower the exchange rate of its currency, unless other factors counteract it. Inflationary depreciation of money in a country causes a decrease in purchasing power and a tendency for its exchange rate to fall against the currencies of countries where the inflation rate is lower. The equalization of the exchange rate, bringing it into line with purchasing power parity, occurs on average within two years. The dependence of the exchange rate on the inflation rate is especially high in countries with a large volume of international exchange of goods, services and capital. 2) The state of the balance of payments. The balance of payments directly affects the exchange rate. An active balance of payments contributes to the appreciation of the national currency, as the demand for it from foreign debtors increases. The passive balance of payments creates a tendency for the national currency to depreciate, because Debtors sell it for foreign currency to pay off their external obligations. The size of the influence of the balance of payments on the exchange rate is determined by the degree of openness of the country's economy. Thus, the higher the share of exports in GNP (the higher the openness of the economy), the higher the elasticity of the exchange rate with respect to changes in the balance of payments. The instability of the balance of payments leads to abrupt changes in the demand for the corresponding currencies and their supply. In addition, the exchange rate is influenced by the economic policy of the state in the field of regulation of the components of the balance of payments: the current account and the capital account. With an increase in the positive trade balance, the demand for currency increases of a given country, which contributes to an increase in its exchange rate, and when a negative balance appears, the reverse process occurs. A change in the balance of capital movements has a certain impact on the exchange rate of the national currency, which is similar in sign (“plus” or “minus”) to the trade balance. However, there is also a negative impact of excessive influx of short-term capital into the country on the exchange rate of its currency, because It can increase the excess money supply, which in turn can lead to higher prices and currency depreciation. 3) National income and exchange rate. National income is not an independent component that can change on its own. However, in general, those factors that cause national income to change have a large impact on the exchange rate. Thus, an increase in the supply of products increases the exchange rate, and an increase in domestic demand lowers its exchange rate. In the long run, a higher national income means a higher value of a country's currency. The trend is reversed when considering the short-term time interval of the impact of increasing household income on the exchange rate. 4) Differences in interest rates in different countries. The influence of this factor on the exchange rate is explained by two main circumstances. Firstly, changes in interest rates in a country affect, other things being equal, the international movement of capital, especially short-term capital. In principle, an increase in the interest rate stimulates the influx of foreign capital, and a decrease in it encourages the outflow of capital, including national capital, abroad. Second, interest rates affect the operations of foreign exchange and capital markets. When conducting operations, banks take into account the difference in interest rates on the national and global capital markets in order to make profits. They prefer to obtain cheaper loans in foreign capital markets, where interest rates are lower, and place foreign currency in the domestic loan market, where interest rates are lower. 5) Activities of foreign exchange markets and speculative foreign exchange transactions. If the exchange rate of a currency tends to fall, then firms and banks sell it in advance for more stable currencies, which worsens the position of the weakened currency. Foreign exchange markets quickly respond to changes in the economy and politics, and to fluctuations in exchange rates. Thus, they expand the possibilities of currency speculation and the spontaneous movement of “hot” money. 6) The degree of confidence in the currency on the national and world markets. It is determined by the state of the economy and the political situation in the country, as well as the factors discussed above that affect the exchange rate. Moreover, dealers take into account not only the given rates of economic growth, inflation, the level of purchasing power of the currency, but also the prospects for their dynamics.
Factors influencing the exchange rate are divided into structural (acting in the long term) and market factors (causing short-term fluctuations in the exchange rate).
To structural factors relate:
Competitiveness of the country's goods on the world market and its changes;
The state of the country's balance of payments;
Purchasing power of monetary units and inflation rates;
Differences in interest rates in different countries;
State regulation of the exchange rate;
The degree of openness of the economy.
Market factors associated with fluctuations in business activity in the country, the political situation, rumors and forecasts. These include:
Activities of foreign exchange markets;
Speculative currency transactions;
Crises, wars, natural disasters;
Forecasts;
The cyclical nature of business activity in the country.
33. Classification of exchange rates: by the method of foreign exchange quotation, by the method of fixation, by the method of establishment, by the presence of quotation on the foreign exchange market, in relation to the participants in the foreign exchange transaction, etc.
1. According to the method of fixation (VK mode) the following types of exchange rates are distinguished:
a) A fixed exchange rate is an officially established relationship between national currencies on the basis of mutual parity. Under a fixed exchange rate regime, the central bank sets the exchange rate of the national currency at a certain level in relation to the currency of any country to which the currency of this country is “tied”, to the currency basket (usually it includes the currencies of the main trade and economic partners) or to the international monetary unit.
b) A fluctuating exchange rate is an exchange rate that changes freely under the influence of supply and demand. A type of fluctuating exchange rate is a floating exchange rate, which involves the use of a foreign exchange regulation mechanism by the country's Central Bank.
c) Intermediate between fixed and floating exchange rate regime options include:
The “rolling fixation” mode, in which the central bank sets the exchange rate daily based on certain indicators: the level of inflation, the state of the balance of payments, changes in the value of official gold and foreign exchange reserves, etc.;
A “currency band” regime in which the central bank sets upper and lower limits for exchange rate fluctuations. The “currency corridor” mode is called both the “soft fixation” mode (if narrow fluctuation limits are set) and the “controlled floating” mode (if the corridor is wide enough). The wider the “corridor”, the more the exchange rate movement corresponds to the real relationship between market demand and supply for currency;
A regime of “joint” or “collective floating” of currencies, in which the exchange rates of countries that are members of a currency group are maintained relative to each other within a “currency corridor” and “float together” around currencies not included in the group.
2. Using the currency quotation method:
a) rate based on direct quotation
b) rate based on indirect quotation
3. By method of establishment
a) official
b) unofficial
4. In relation to the parties to the transaction
a) buyer's rate
b) seller's rate
c) average rate
5. Based on the availability of quotes on the foreign exchange market
a) quotation rate
b) cross rate (the relationship between two currencies, which follows from their relationship to a common third currency).
It is necessary to distinguish between market and structural (long-term) changes that affect the exchange rate.
Market factors affecting the exchange rate include:
1. State of the economy: inflation rate, level of interest rates, activity of foreign exchange markets, currency speculation, foreign exchange policy, balance of payments, degree of use of the national currency in international payments, acceleration or delay of international payments (economic factor).
2. Political situation in the country (political factor).
3. The degree of confidence in the national currency on the national and world markets (psychological factor).
Market factors are associated with fluctuations in business activity, the political and military-political situation, rumors (sometimes wild), guesses and forecasts. Often the exchange rate depends on how pessimistic or optimistic the public is about government policies.
An increase in interest rates on deposits and/or yields on securities in any currency will cause an increase in demand for this currency and will lead to its appreciation. Relatively higher interest rates and yields on securities in a given country (in the absence of restrictions on capital movements) will lead to:
1) to the influx of foreign capital into this country and, accordingly, to an increase in the supply of foreign currency, its reduction in price and appreciation of the national currency;
2) deposits and securities in national currency that bring higher income will contribute to the overflow of national funds from the foreign exchange market, reducing the demand for foreign currency, depreciating the foreign currency and increasing the exchange rate of the national currency.
The important economic significance of the exchange rate is due to the need for its state regulation.
Along with the above factors, the influence of which is difficult to foresee, relatively long-term trends also influence the demand and supply of currency.
These include:
1. Competitiveness of goods on world markets and its changes. They are ultimately determined by technological determinants. Exports stimulate the influx of foreign currency.
2. Growth in national income causes increased demand for foreign products, while merchandise imports can increase the outflow of foreign currency.
3. A consistent increase in domestic prices compared to prices in partner markets increases the desire to purchase cheaper foreign goods, while the inclination of foreigners to purchase goods or services that become increasingly more expensive evaporates. As a result, the supply of foreign currency decreases and the domestic currency depreciates.
4. Other things being equal, an increase in interest rates is a factor in attracting foreign capital and, accordingly, foreign currency, and can also lead to an increase in the price of domestic currency. But raising interest rates, as we know, also has a downside: it makes loans more expensive and has a depressing effect on investment activity within the country.
5. The degree of development of the securities market (bonds, bills of exchange, shares, etc.), which constitute healthy competition for the foreign exchange market. The stock market can attract foreign currency directly, but also attract domestic funds that would otherwise be used to purchase foreign currency.
2.4 Basic methods of exchange rate regulation
The main currency regulation body of the Russian Federation is the Central Bank of the Russian Federation. It determines the scope and procedure for the circulation of foreign currency and securities in foreign currency in the Russian Federation, establishes the rules for residents and non-residents of Russia to conduct transactions with foreign currency and securities in foreign currency, as well as the rules for non-residents to conduct transactions with rubles and securities in rubles and etc.
The main methods of currency regulation are:
§ foreign exchange intervention (purchase and sale of currency, as well as securities);
§ “discount policy” - a change by the central bank in the level of interest rates and/or required reserve standards;
§ currency restrictions.
Currency restrictions are restrictions on transactions with national and foreign currency, gold and other currency values introduced by law or administrative procedure.
Currency control in Russia is carried out by currency control authorities and their agents. The currency control authorities are the Central Bank and the Government of the Russian Federation. Currency control agents are organizations that, in accordance with legislative acts, can exercise currency control functions, in particular, the Federal Service of the Russian Federation for Currency and Export Control and authorized banks.