# What faction determines the strength of a state's currency and can that faction be rebelled?

I know that to determine the strength of a state's currency (a currency's Equilibrium Price), the following factors are contemplated by some faction, but I don't know what is that faction.

## Contemplated facotrs

1. Amount of money going in and out of a currency's state; especially due to more exporting than importing; in a given period of time
2. Stability of the strength of a state's currency in given a period of time
3. Tendency of a state to be at war (negative immigration) in a given period of time
4. Tendency of a state to be at anarchy (drastic law changes) in a given period of time
5. Traffic jams and/or parking shortages trend, that significantly inhibits state economy

### Further possible factors

• Level of automation in business sector
• Weight of general cost of living in median wage, to measure general cost of living (high cost of living might indicate less currency strengthening from both tourists and expatriates with income)

## My question

I ask the following question both that others and myself will learn what is the aforementioned faction and to also get the ability to figure out why since maybe 2014, the Thai Baht is getting stronger so fast that the Bank of Thailand seems to me helpless to inhibit or prevent that situation which might indicate a particular state's bank is not a faction to set the strength of its currency and is actually a captive of a higher power it cannot or likely won't be able to rebel.

What faction determines the strength of a state's currency and can that faction be rebelled?

• Which authority on planet earth determines the price of bananas?
– user18
Nov 12 '19 at 1:34
• @KennyLJ if bananas would grow only in one country, this might have been a good question, I guess.
– user24868
Nov 12 '19 at 1:37
• The oh so wonderful invisible hand. Gotta love markets Nov 12 '19 at 1:56
• This is economic 101. You can further the study into Behavior economics, which, will tell you that human behavior(AKA market) will decide the value of the "money" even under a totalitarian government. So this question is a lengthy brainstorm concept exchange and do not have a "right answer" . Nov 14 '19 at 13:24
• On the internet there is a lot of herding behavior, once you have a negative vote count you will have it very difficult to reverse that. What do you mean with "faction" and "determination"? I guess you have already understood that the prices are set in the market, so no single individual or organisation, right? Markets in general cannot be easily "rebelled" - a more common term would be manipulated. And most economists would tell you that this is good the way it is. Nov 22 '19 at 15:29

There is no central authority that determines the strength of currency in floating exchange rate regime as it’s determined by the market.

As in every market you have demand and supply for currency.

The demand is given by people who want to hold the Thai currency. That is people who want to import goods from Thailand, people who want to invest in Thai bonds.

The supply of currency is determined by central bank. However, this in practice does not mean that central bank can set supply at any level. For example, we know from monetary economics that holding all other things constant increase in money supply lead to inflation, and if central bank does care about monetary stability it can’t just expand the money supply without limits.

The final exchange rate is determined by an equilibrium point at which the quantity of Thai currency demanded is exactly equal to the quantity supplied.

• The supply is not uniquely determined by the central bank. If the central bank does nothing but all those who currently hold the currency try to sell it the price goes down because of increased supply, right? Nov 19 '19 at 9:09
• @JanHöffler you can also say it's the decreased demand
– Art
Nov 21 '19 at 1:45

Think of the exchange rate as the price of a currency—in this case the Thai baht. So the exchange rate (THBUSD in this case) is just how many USD you need to buy one THB.

As you said, multiple factors determine the equilibrium price of the currency... most often quoted is perhaps the continued current account surplus (more or less that Thailand exports more than it imports). When a country exports, foreigners need the local currency (THB) to buy Thai goods. This drives up the demand for THB and hence its price.

# Influencing the price

Can the Bank of Thailand set the price of THB? Yes, in a sense. Just like anyone could set the price of a banana. This is called FX intervention.

### Appreciation side

Let's say you think the price of a banana (right now \$5) should be higher... at \$10. What you need to do is to drive up demand. You go out and say you're willing to pay anyone \$10 for a banana. Naturally, nobody would be selling bananas at \$5 anymore because they know they can sell one to you for \$10. Problem: you could quickly run out of money. This was basically what happened in the Asian Financial Crisis of 1997. When you can't buy bananas at that (artificially) high price anymore, you say, sorry guys... no more bananas for \$10. The price of bananas fall.

John's paraphrase: Let's say some banana seller thinks he doesn't earn enough with the current banana price (right now \$5) and decides to lift the price (say \$10). By humanity's most common economic model, most rivals will start to sell it in the same price. Banana buyers will lose money and will keep losing it until a protest that would bring the original price back.

A: This is not entirely correct. What the central bank does in this case is to act as a buyer, buying up any bananas available at the price of \$10. This creates an infinite demand for bananas at \$10, driving up the price. This is the green line in the chart (please excuse my poor drawing.)

### Depreciation side

Now let's say you think the price of a banana should be lower (to help exporters, for example)... at \$1. What you need to do is simply to increase supply. Concretely, you start growing bananas like crazy and announce that you'd sell all bananas you have at \$1. Naturally, people will buy from you instead of from other sellers.

Problems: If people believe bananas' equilibrium price is actually \$5 and not \$1, then all of the sudden bananas become very attractive as you can buy them for very cheap. They'll want to buy more, driving up the price.

In addition, you're now full of cash (USD). People say, this guy has lots of money (foreign exchange reserve) so if there's negative shock to bananas (people start to realize that bananas are bad for your health, which would have driven the price of bananas lower, to \$0.5, for example) he could still manipulate the market so that the price remains stable close to \$1.

Knowing this, poeple see bananas as a safe asset and demand even more in times of uncertainty, driving the price of bananas even higher, going against your intervention. One more problem is that some country labels other countries "banana price manipulator" if you sell too much bananas ;)

John's paraphrase: By the model, a seller who wishes to lower his price, should increase supply. He could grow bananas and sell them in \$1 and usually people will buy from him instead from his rivals. If people assume bananas are bad for health they would buy less and that seller will sell in \$0.5 Some rivals might gang up to affect the masses not to buy from him.

A: The first part is correct. The part after, "If people assume bananas are bad...," however, is not. I've updated my answer above.

• One thing I'd like to point out is that "Continued CA Surplus" is not a specific term... it's just the fact that Thailand has been running CA surplus for at least 5 consecutive years. We don't have abbreviation for this, just as we don't have one for "A Period of Low Interest Rate (APLIR)". I'll update the things about FX intervention in my answer.
– Art
Nov 14 '19 at 9:16
• I thank you dearly for your edits: I think the fact that this is all based on D&S model that Thailand uses should be noted, but Thailand (or any other state for that matter) can indeed rebel that model and set the price not by D&S but by how it wants it to be. As a side note: I personally not sure that all states on this planet do you use D&S.
– user24868
Nov 15 '19 at 3:53
• Unfortunately I don't think demand and supply is not something a country "chooses" to use. I'm merely explaining how things would go if you try to go against the market forces.
– Art
Nov 15 '19 at 5:15
• Hi. I re-read and I still don't understand why the bank can't rebel the market and arbitrarily set the price to what it prefers to to make Thai citizens export more or at least sell more for tourists... Maybe I missed something.
– user24868
Nov 15 '19 at 10:41
• The problems I pointed out above?
– Art
Nov 15 '19 at 10:43