Question

How does balance of payment affect foreign exchange rate? Explain.

Answer 1

 A change in a country's balance of payments can cause fluctuations in the exchange rate between its currency and foreign currencies. ... The balance of payments does not impact the exchange rate in a fixed-rate system because central banks adjust currency flows to offset the international exchange of funds.

Answer 2

Hey friend !
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Favourable balance of payment means a situation in which receipts of foreign exchange in more than payment of foreign exchange, consequently supply of foreign exchange will be more than demand for foreign exchange due to this domestic currency will appreciate and reduce foreign exchange rate. On the contrary unfavourable balance of payment means a situation in which receipt of foreign exchange is less than payment of foreign exchange consequently demand for foreign exchange will be more than supply of foreign exchange due to this, domestic currency will depreciate and increase foreign exchange rate.
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# Hope this helps.