The exchange rate is of interest to everyone, or almost everyone. Even those who have never conducted financial transactions in their lives look at the boards of exchange offices every day. But what is the exchange rate and how is it formed? Let's try to figure it out.

In fact, there are exchange rates and motto rates. The exchange rate is the amount of the national currency that is equated to the unit of any foreign currency. Simply put, how much Ukrainian hryvnia is one US dollar. But the reciprocal, or motto rate, is the amount of foreign currency per one unit of national currency. Well, or again, using a simple example - how many American cents will be "given" for one Ukrainian hryvnia. These two rates - exchange rate and motto rate - we see on all the boards of exchange offices.

And what do these figures depend on, what factors make these figures change hourly or remain unchanged for weeks? Let's try to figure it out.

First you need to understand that currency is the same commodity as any other product or resource. And the price of this product is determined by supply and demand. The emergence of foreign currencies within the country is a consequence of international trade. International trade differs from domestic trade in that it uses the national currencies of different countries. In the process of international trade, these national currencies must be exchanged for each other, otherwise neither import nor export will be possible. There is an international currency market for this exchange.

And one more important point. There are two types of currencies: freely convertible and national. The first include U.S. dollar, Euro, British pound, Japanese yen, Swiss frank etc (18 currencies in total). These currencies are traded on international currency markets. The second, national ones, are traded on domestic markets, and the rate of these currencies is formed taking into account a number of peculiarities. It is these features, in the end, that give us the same cherished numbers on the exchange board.

So, the formation of the rate begins with the establishment of the official rate by the National Bank of Ukraine. He does it daily. And now market factors come into play. If production develops in the country, the economy grows and the judicial system is independent, investors are ready to invest their capital in the national economy, then they need the national currency (Ukrainian hryvnia). Consequently, the demand for the national currency is growing, and with it the rate of the national currency is growing. But if the state turns on the printing press in order to pay off its domestic debts (and this is not only domestic bonds, but also social payments, salaries in the public sector, debts of municipal authorities to citizens and utilities), then the national currency becomes too much, and its course falls.

Supply and demand for national currency is also formed due to the need to pay for imports. The importing company, in the end, is interested in maximum profit in the national currency. The more expensive the national currency, the more profitable the import.

Significant value in strengthening hryvnia exchange rate recently received such a phenomenon as labor migration. People, working outside the country, send the earned currency to Ukraine. For example, at the end of 2019, the volume of private foreign exchange transfers to Ukraine amounted to about $ 12 billion. Unfortunately, due to quarantine, this figure has dropped significantly in 2020.

In addition, the main factors influencing the exchange rate of the national currency include the change in prices on world trading floors. The main Ukrainian commodities are wheat, steel and iron ore. This is export. The quotation of the Ukrainian hryvnia largely depends on their value. This group of factors can be added to political relations with neighboring countries, in particular, with the Russian Federation, as well as trade restrictions imposed due to the military conflict (loss of part of the markets for Ukrainian exports).

There are also seasonal factors. These are large-scale holidays and vacation seasons. As a rule, we all tend to spend the accumulated currency at this time in order to please ourselves with tasty things for the holiday or to take our loved ones to the sea. Well, yes, the Ukrainian people still do not believe in the stability of their native hryvnia, so they prefer to make savings in banknotes of other countries.

These are factors that, to some extent, can be foreseen or predicted. However, when political factors come into play, no analyst will give you a clear prediction. Political factors are elections at all levels, changes in the country's legislation, the country's entry or non-entry into various interstate associations, etc. And all these changes in the country's political landscape have repeatedly caused panic in the foreign exchange market. Yes, human psychology is also one of the significant factors that determine the current situation in the country's foreign exchange market. As soon as we are promised that tomorrow will be better than today, we immediately rush headlong to the nearest exchange office to exchange our native hryvnia for any foreign currency.