Determinants Of Exchange Rates Introduction - Forex Management

On the most fundamental level, exchange rates are market-clearing prices that equilibrate supplies and demands in foreign exchange markets. Obviously, it is the supply of, and the demand for, foreign currency that would determine at any time the rate of exchange of a country’s currency just as the market price of commodities is determined by the forces of demand and supply. Managers of multi national enterprises, international portfolio investors, importers and exporters, and government officials are very much interested in knowing the determinants of exchange rates. An important question to be answered is whether change in exchange rates predictable?
Unfortunately, there is no general theory of exchange rate determination. Instead, there are economic theories called parity conditions that attempt to explain long-run exchange rate determinants. Numerous other variables appear to explain short and medium-run exchange rate determinants. A major problem is that the same set of determinants does not explain rates for all countries at all times, or even for the same country at all times.