The exchange rate is constantly in a state of fluctuation, therefore, to avoid financial and economic risks, it is necessary to understand the forecasting mechanism and the mechanism that explains how the exchange rate is formed.
This issue is especially relevant today, when Russia seeks to get out of dollar dependence by pursuing an independent policy. To understand some of the difficulties that arise along this thorny path, you need to understand how the exchange rate is formed in Russia and around the world.
A bit of history
Until the thirties of the last century, in most countries the so-called gold standard operated. According to him, the gold content was set in the currency. Governments were required to exchange their currencies for gold. To support the system, a strict correlation was introduced between the money supply inside the country and its gold reserve. According to the gold content, their courses were formed. For example, one US dollar had twenty-three and twenty-two hundredths of a grain of gold, and one British pound had one hundred and thirteen grains, that is, four point eighty-seven hundredths more. According to these calculations, the exchange rate was determined, where one pound was equal to 4.87 dollars.
Gold exchange system
After the thirties and the Great Depression in America, in most countries a gold and currency system was established, where exchange rates were formed due to the relation to the reserve currency, which became the dollar. The maintenance of exchange rates in stability was facilitated by the International Monetary Fund created in 1944. At the expense of contributions, loans were issued from there to states in financial difficulties.
Floating exchange rate system
How is the exchange rate formed? In the seventies, the gold exchange system was replaced by a system of floating exchange rates. Its meaning lies in the formation of exchange rates due to the relationship of supply and demand, like securities on an exchange. However, the exchange rate did not become completely free. Upon reaching a certain limit, the state had parity (as since 1979 in Europe), and the Central Bank of the country, coordinating its actions with other countries, officially changed course. If the change was downward, then there was a revaluation, and the increase - devaluation. The limit was reached with changes of several percent, but in the nineties it increased to fifteen percent.
Revaluation and devaluation are not the only means of state intervention in the process that explains how the exchange rate is formed. To avoid strong fluctuations, they introduce the so-called currency interventions, where, if the exchange rate falls, they buy it, and if on the contrary, they sell it.
The mechanism is far from always successful, since the owners of the national currency located abroad do not obey the instructions of their governments. For example, if the United States raises the interest rate on a loan, then the credit rate of monetary units outside the United States remains the same, which makes them more attractive.
General factors affecting the formation of the exchange rate
How the exchange rate is formed on the stock exchange, in banks and in states as a whole.
Export and import. The higher the price compared to overseas in the country, the greater will be the import. Thus, the price of foreign currency will be high.
With the growth of income, the demand for imports will increase, which will cause the depreciation of the national currency.
On the other hand, with high national income abroad, the price of foreign currency is reduced.
The movement of capital. If the investor wants to receive more foreign cash, deposits, stocks, bonds and liabilities, the price of foreign currency increases.
On the other hand, payments to any state strengthen its currency.
Data output and waiting for data output. Such data include: publication by the host countries of economic indicators, statements on changes in interest rates, reviews of the economic situation, and more.
Funds activities. The huge force influencing the movement of exchange rates is held by funds when investing in certain currencies. They have great resources that can make the course move in any direction.
Activities of exporters and importers. They are users of the foreign exchange market, interested in the sale and purchase of foreign currency. However, this impact is insignificant and short-term, because the volumes of their foreign trade transactions are negligible in comparison with the total volume of transactions in the foreign exchange market.
Statements by politicians. At various meetings, summits, press conferences and so on, such statements are carefully monitored on-line, after which the foreign exchange market immediately reacts depending on the strength of the statements.
Everyone remembers the end of 2014, when Russian President VV Putin instantly stabilized the ruble exchange rate (“spoke the course”) with one speech, thus stopping its rapid decline.
The activities of central banks. The mechanism of its influence is described below.
central bank
Consider how the Central Bank exchange rate is formed.
The influence of states on the foreign exchange market is carried out through central banks. As already noted, it is extremely rare that the state does not intervene at all in currency exchange operations (the state of free swimming). As a rule, from time to time they affect the exchange rate (the state of dirty swimming), thus affecting how the exchange rate of the Central Bank is formed.
In the interests of production and consumption, governments carry out direct and indirect regulation. Direct regulation takes place with discount policies and foreign exchange interventions. Indirect regulation is carried out through the inflation rate, the amount of money in circulation and more.
TSB RF
Further on how the exchange rate of the Central Bank of the Russian Federation is formed.
Every day, except weekends, the Central Bank of the Russian Federation sets rates for most currencies against the ruble. Dollar to ruble is determined based on how trading on the Moscow Interbank Currency Exchange took place the day before. The same applies to the euro. The remaining currencies are formed through cross-rates, that is, the ratio between the ruble and another currency, based on the relationship to the dollar.
The way the CBR exchange rate is formed is also affected by import and export. If more goods are sold than bought, it will be better for the national currency to fall in price, and vice versa.
The Central Bank sets the rate of more than thirty types of currencies. This is the dollar, euro, yuan, franc, yen, hryvnia and others.
Since 2005, the Central Bank of the Russian Federation switched to a dual-currency basket of dollar-euro. It is believed that in this way more flexible regulation is achieved and an increase in volatility is realized. The exchange rate is calculated from the ratio in the Forex markets of the dollar-euro pair and on the MICEX of the ruble quotes against the euro.
Banks
How is the exchange rate in banks formed? Other banks may set their own rates. They mainly offer to buy currency at a lower cost, and to sell - more expensive than the price offered by the Central Bank.
MICEX
How the exchange rate on the MICEX is formed is also an interesting question.
Trading in foreign currency on the Moscow Interbank Currency Exchange is regulated by the Central Bank of the Russian Federation, which exercises its functions on the basis of the federal law on public procurement, the federal law on currency regulation and control.
Forex trading
It is difficult for an ignorant person to understand how the exchange rate on Forex is formed.
In the international Forex market, price is determined by the struggle of buyers (or bulls) and sellers (or bears). Individuals are not able to influence the situation in this market. Only the International Monetary Fund and central banks can affect the dynamics of prices, and then only in the short term.
The patterns explaining how the exchange rate is formed here are as follows:
When the demand for currency increases, its price rises, and when demand decreases, then, accordingly, the price decreases.
When the supply of currency rises, its value falls, and when the supply decreases, the price, on the contrary, rises.