Global currencies are witnessing daily and continuously changes in their exchange rates against other currencies, sometimes in decline and at other times in ascending around the clock, and the causes of these fluctuations can be divided into several factors.
First: economic factors
1- Interest rates and capital movement
Interest rates are an important concept in economics and are considered the most important metrics for evaluating a country’s currency value. The higher interest rate offers borrowers higher returns compared to other countries, for this reason, the higher interest rate attracts foreign capital and causes the exchange rate to rise. And resort to central banks in the world to raise interest rates in the event of inflation and vice versa in the case of recession.
The Turkish central bank raised the interest rate yesterday, Thursday, 7 June, from 16.5 percent to 17.75 percent. After that, the Turkish lira rebounded, reaching its price against the US dollar to below 4.45 levels, down from the level of 4.90 against the dollar.
2- Relative price levels and changes in exports and imports
The decrease in prices in one country while remaining stable in another country leads to an increase in the demand for the first goods and services, thus increasing exports and then increasing the demand for its currency, which leads to an increase in its price against other currencies, and vice versa in the event of an increase in prices.
If a country’s exports are greater than its imports, this means an increase in the demand for its currency and an increase in its exchange rate.
Second: government control over the exchange market
In the period between 1944 and 1971, the “Bretton Woods” system prevailed in the monetary policies of countries in determining the value of their national currencies. The US government took the initiative to invite 44 countries to meet in July 1944 in Bretton Woods in New Hampshire to agree on a monetary system. New international, in order to ensure stability and global economic growth.
As this new monetary system is based on the “gold dollar exchange rule” and on the basis of the “gold exchange scale”, thus converting the US dollar from a local currency to an international reserve currency, as one dollar equals 0.88671 grams of net gold, meaning that every $ 35 Equivalent to an ounce.
However, US President Nixon decided in 1971 to prevent the conversion of the dollar into gold, which led to the collapse of the Bretton Woods system.
Since that time, the monetary policies of countries have been based on two basic systems of evaluating the currency, the first: it is the fixed exchange system in which the price of the currency is fixed, either to one currency, or to a basket of currencies.
The second: is the flexible exchange system, which is done through either managed float, that is, leaving the exchange rate to be determined according to supply and demand, with the central bank resorting to intervention whenever the need arises to adjust this price against the rest of the currencies.
Or free float, meaning that the market is the one that controls the currency exchange rate according to supply and demand without interference from the central bank.
Countries resort to the decision to reduce the value of their national currencies mainly according to what they see appropriate to the nature of their economy.
The devaluation of the national currency leads to making the prices of imported goods more expensive for residents and thus leads to a decline in imports, and in return, local commodity prices become cheaper with respect to abroad, which enhances the capacity of national products and increases the volume of exports abroad. Thus, the balance of trade in the country returns to a state of balance.
Others, such as China and Japan, are among the countries that seek to reduce the value of their currency the most, because the two countries depend mainly on exports, and the lower the value of the currency, the higher the demand for exports, so the value of the low currency always becomes, it is the best option for countries that have strong production and are looking About export.
Third: political stability
The currency exchange rate is affected by political factors in the country, as political stability in a country leads to an increase in investor confidence in that country’s economy. As investor confidence affects currency prices. If investor confidence in a country’s economy is high, the probability that investors will purchase assets in that country will be high, which will push the value of the country’s currency up. In the opposite case, this leads to a devaluation of the country’s currency.
The stability of the currency unit is a basic and necessary condition for the stability of people’s transactions in their economic activities at the country level and in external economic dealings between countries. Of course, the instability of the currency value constitutes an imbalance in the rights and obligations of the people. The instability in the value of the currency weakens confidence in it, and severely disrupts economic relations, and ultimately leads to the abandonment of the economic units of this weak currency, and resort to the acquisition of strong currencies and precious metals. This makes matters worse and turmoil within the state.