Factors Influencing The Flow Of Foreign Exchange

The main factors which influence the movement of foreign exchange from one country to another are as follows:
(1) Leads and Lags

If a country expects that a change in the rate of exchange is likely to be in its favour, there will be a movement of funds to that country. Efforts will also be made to create delay in the settlement of debts. Payments for the imports will be made before they fall due. On the other hand, if a country fears that a change in the rate of exchange is likely to be unfavourable to it, then attempts will be made to secure early payments of debt. Efforts will also be made to make payments to the creditor country before they fall due. These factors which influence the movement of foreign exchange are know as 'leads and lags'.

(2) Arbitrate

Arbitrate is a process of buying a thing in one market and selling it at the same time in another market in order to take advantage of price difference. For instance, if there arises a difference in the stock exchange rates between Pakistan and England, the businessmen can take advantage of the price difference by buying the foreign exchange or shares in the cheaper market and sell them in the dear market. They can thus make profit out of the difference in the prices of shares or foreign exchange rates.

(3) Political and Economic Conditions

If there is political instability and labour unrest in the country, the industrial growth will be adversely affected. There will be movement of foreign capital outside the country. In case the government of a country encourages private enterprise and gives liberal concessions, the growth of exports will be stimulated and the supply of foreign exchange increases.

(4) Seasonal Factors

The rate of foreign exchange is also affected by the seasonal fluctuations in the export and import of commodities. The central bank and other foreign exchange dealers try to smooth down the fluctuations in the rate of foreign exchange by purchasing foreign exchange when the exports are at its height and sell the held up foreign exchange when the imports are liberalized.