Factors affecting foreign exchange rates

the exchange rate for any foreign currency depends on a multitude of factors reflecting economic and financial conditions in the country issuing the currency. one of the most important factors is the status of a nation‘s balance-of-payments position. when a country experiences a deficit in its balance of payments, it becomes a net demanded of foreign currencies and may be forced to sell substantial amounts of its own currency to pay for imports of goods and services. therefore, balance-of-payments deficits often lead to depreciation of a nation‘s currency relative to other currencies. During the 1970s, when the United States was experiencing deep balance-of-payments deficits and owed substantial amounts abroad for imported oil, the value of the dollar sagged dramatically.Both the Federal Reserve System and the Treasury were forced to enter the foreign exchange markets with heavy purchases of dollars and offering of dollar-denominated government securities to create a demand for dollars and prop up the dollar‘s exchange value.