Meaning:

Foreign exchange is the name given to any foreign currency. The market in which currencies of various countries are exchanged is called foreign exchange market. The participants of this market are commercial banks, foreign exchange brokers, other authorized dealers, monitory authorities etc. Foreign exchange rate is the price of one country’s currency in terms of another countries currency. The foreign exchange rate, also known as the foreign currency, is the rate at which one currency can be exchanged for another. The factors determining exchange rate are.

Factors determining exchange rate:

1. Speculation: Foreign exchange speculation where foreign exchange is demanded for the possible gains from the appreciation of currency can influence the exchange rate. Money is considered as an asset in every country, if Indians believes that the US dollar is going to increase the value relative to the rupee, they will want to hold dollars. This expectation would increase the demand for dollars and this increase demand will raise the rupee dollar exchange rate at present making the belief self fulfilling.
2. Interest rate: Huge fund owned by banks, MNC and wealthy individuals move around the world in search of the highest interest rates. Suppose there are no restrictions imposed by the government on the flow of capital funds between the countries USA and India let us further assume that a government bond in USA pay 5% rate of interest whereas equality safe bond in India yields 8%. The interest rate differentials are 3%. American investors will be attracted by the higher interest rate in India and will buy Indian currency selling their own currency. At the same time Indians investors will find investing in their own country more attractive and will therefore demand less for American dollar.
3. Income: When income increases consumers spending increases. So spending in imported goods will also increases, when import increases demand curve of foreign exchange shift to the right so that domestic currency depreciates and due to the upward shift of the demand for dollar curve  exchange rate is established at dollar 1= rupees 83 which indicates depreciation of Indian rupee, if there is an increase in income abroad as well as domestic export will rise and the supply curve of foreign exchange shift outwards on balance, the domestic currency may or may not appreciate what happens will depend on whether exports are growing faster than imports, generally other things remaining the same currency of a country who aggregate demand grows faster than the rest of the world depreciate as its imports grow faster than its export its demand curve for foreign currency shift faster than its supply curve.
4. Inflation: Here we under stand how a relatively higher rate of inflation in a country can affect the exchange rate of its currency, suppose in India relatively higher rate of inflation prevail than in the USA. A relatively higher rate of inflation in India will cause rise in price of goods, in India as compared to those of USA and will there find make Indian goods expensive. So Indian individuals and firm will get the incentive to increase their import from the USA this will rise the demand for US dollar, at the same time due to higher price level in India American people will consider Indian goods more expensive and reduce their imports of Indian goods.
5. Public Debt: Countries with high levels of public debt are less attractive to foreign investors due to the risk of inflation and potential default, leading to currency depreciation. High debt levels can lead to inflation if a government prints money to finance the debt.
6. Political Stability and Economic Performance: Countries with less risk for political uncertainty are more attractive to foreign investors. Political stability, strong economic performance, and good governance typically lead to an appreciation of the currency.
7. Terms of Trade: The ratio of export prices to import prices affects a country’s trade balance and, consequently, its currency value. An improvement in a country’s terms of trade indicates that export prices have risen more than import prices, leading to higher revenues and currency appreciation.

Other things being equal when there is an increase in demand for foreign exchange rate causing a shift in the demand curve it will lead to fall in the rate of exchange and vice versa. Similarly an increase in supply of foreign exchange will lead to rise in the rate of exchange and vice versa. However the extent of change in the exchange rate as a result of change in demand or supply position depends on the nature and degree of the respective elasticities.

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