Tuesday, December 22, 2009

Rupee Vs Dollar

Demand for a particular currency is determined by many factors, including:
- Country's inflation,
- Interest rates,
- Political and economic outlook,
- Monetary policies, and
- Speculation.
The U.S. dollar does not move uniformly against all currencies - it can be rising against one currency while it is declining against another.

Currency exchange rates tend to be affected by macroeconomic variables, such as the major economic indicators released by governments at fixed intervals. For instance, the Gross Domestic Product (GDP), unemployment rate, and even current interest rates (prime rates) can all affect currency exchange rates. However, it is possible for major political events (such as elections, wars, etc.) to also affect currency exchange rates. Even commodities (gold, oil prices, wheat, etc.) may affect the exchange rates between countries.

But commodity price shifts will not affect all nations, or their currencies, in the same manner. After all, nations with moderate supplies of a commodity will not have their currency affected as greatly by price shifts as nations who are have little to no supply of their own. In the same vein, for example, nations who have vast oil supplies and who therefore have a significant portion of their economies tied to crude prices will see strong correlations between commodity prices and their currency exchange rate. When the domestic economy is greatly affected by commodity price shifts, then the currency is especially vulnerable. Even for nations whose currency is strongly correlated with commodity pricing, different commodities will affect the currency differently (or perhaps not at all). By knowing which commodities are strongly correlated to which countries, an FX trader can better predict how commodity price shifts will affect currency exchange rates.
It is very difficult to pin point the exact reason for decline in dollar rate vis a vis Indian Rupee, however, the strong position of the Rupee seems to be due to better Economic situation in India.