The past two weeks have been disastrous for the rupee value against dollar currency.

The same time last month (22-Aug-2011), rupee value against dollar was 44.5 45.0 range, it is hovered to the range of 49.0 50.0. It is expected to raise further which would result in weakening the rupee value against the dollar currency.

There are many factors to decide the currencies values but that could be very difficult for the common man to understand the theory. Here I will put it in the simple words why the currency value is often fluctuated. A currency will tend to become more valuable when its demand is higher than supply. A currency will tend to become less valuable when its demand is less than supply. It is the basic theory. We need to understand in the global economy terms, when the currency will have more demand and when it will have less demand. Remember that exchange rates are expressed as a comparison of two currencies. It is always relative and can be measured between two countries. Interest rates, Inflation and exchange rates are highly related. Reserve bank change the interest rates to control the Inflation and exchange rates.

Inflation As a general rule, a country with a consistently lower inflation rate exhibits a rising currency value, as its purchasing power increases relative to other currencies Interest Rates A higher interest rates offer good returns compare to other countries. It will result in the foreign capital come into the country. Lower interest rates decrease the currency value

Current Account Deficits Basically current account of a country presents the status on the trade of a country between other trading partners. If there is any deficit in the current account, that means country is doing more trading outside the country then its actual earning inside the country. This situation is not good for a country because the country needs to buy more foreign currency to fulfill its need inside the country. A country needs to manage its deficit within control, otherwise it will lead to a economic problem. More demand for the foreign currency would reduce the value of that countrys currency.