Exchange Rate Dynamics Dr. Havaldar Deepak* *Associate Professor, Amity University, Mumbai, India. Abstract Exchange rate basically depends on demand for foreign exchange and supply of foreign exchange which depend on countries balance of payment situation which gets affected mainly by country's exports and imports on the side of current account and the flow of foreign institutional investments, borrowings, and direct investments on the capital account. Exportsand imports mainly depend on price level in the county and in other countries which also include the taxes and the tariffs in the domestic as well as in the foreign country with which we trade and/or have financial flows.Excess demand, whether it is in money market, goods market or labor market play important role in determining the price level in the country. FIIs depend on the present exchange rate, on the stability of the economy, expected growth of the economy, present and expected inflation rate and also on spot exchange rates, expectations of future exchange rate. Though current prices depend on current and past circumstances the exchange rate depends on current and future expectations of the exchange rate. This paper develops a model where the government policy whether it is domestic or foreign government, especially policy of U.S. govt. (fiscal or monetary, especially monetary) plays a crucial role in determining the exchange rate and the fluctuations of exchange rate. Top Keywords Announcement of news, Exchange rate, Expectations, Foreign policy, News. Top |