Currencies are trade in foreign exchange market and it is always the busiest place in financial market. Foreign exchange currency (Forex) involved trillion of dollars on a daily basis. Transactions of foreign currency are facilitated by banks, financial institutions and spread betting companies. The exchange rate is determined by the foreign exchange market.
There are several determinants affecting the movement of exchange rate: Market Forces and Government intervention. The dual market forces of supply and demand determined the movement of currencies. The dual forces of supply and demand are much affected by factors such as trade activities between countries, government policy and political insatiability. Secondly, Government can influence the exchange rate through the implementation of government monetary policy.
In the short run, government fiscal policy and monetary policy may affect the dual forces of supply and demand thus determined the exchange rates. However, no policy can overcome market forces in the long run, as we observed in the current financial crisis.
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