Final answer:
The factors that influence the interbank spread on a currency pair include speculation, rates of return, and trade.
Step-by-step explanation:
The factors that influence the interbank spread on a currency pair include:
- Speculation: In the extreme short run, exchange rates are influenced by speculators who try to invest in currencies that will grow stronger and sell currencies that will weaken.
- Rates of Return: In the relatively short run, exchange rates are influenced by differences in rates of return. Countries with high real rates of return (e.g., high interest rates) tend to experience stronger currencies as they attract money from abroad.
- Trade: The exchange rate is impacted by the trade activity between countries. Countries with a strong trade position tend to have a stronger currency.