Abstract
Exchange rate is one of the most examined and analyzed financial variable which is operated by the government. Exchange rate plays a key role in the development of economic health and level of trade. The higher the exchange rate is the lower the trade of balance. Whereas, the lower exchange rate would increase the trade of balance of country. In this study, we tried to explore the relationship between the gross domestic product growth (GDP growth), consumer price index (Inflation) and interest rate with the exchange rate for the developed and developing countries. Three G7 countries Canada, UK, and Japan and three developing countries India, Brazil, and South Africa are selected for this purpose. Using the OLS regression estimation and Granger causality test, the results show that GDP growth, inflation and interest rate have a strong influence on the exchange rate for both the developed and developing countries. oreover, we also used the panel data analysis. The results show strong and significant impact of all macroeconomic variables on the exchange rate. Since, the exchange rate is very important and critical in a free market economy, therefore, it is suggested to the policy makers that they should be attentive to control the system so that the luctuation
in any macroeconomic variable will not be able to disbalance the market performance.
