Factors Affecting Kenya Shillings Volatility Against the United States Dollar

Abstract

The study sought to identify the factors that affect Kenya shilling volatility against the US dollar. Data used in the study was collected from the central bank of Kenya and the Kenya bureau of statistics for a five year period. The study used descriptive research design to portray the variables influencing Kenyan shilling volatility against the US dollar. Descriptive statistics such as frequency distribution and percentages were used to analyze general information. Means and standard deviations were used to analyze the correlation between the variables. The findings were presented in form of tables to give a representation of the research findings on the extent of correlation of Kenya shilling volatility against the US dollar, against factors such as GDP, balance of payment, interest rates and inflation. The study concluded a positive relationship coefficient between GDP and Kenya shillings volatility, and a negative relationship with interest rates, inflation and balance of payments. The study found out that inflation decreases the availability of cash and makes it hard for the economy to afford purchases of goods and services. Inflation does not support Kenya shillings stability against foreign currency because it reduces the level of business activity in the economy, and therefore demand for foreign currency declines. The study found that Interest rates influences Kenya shillings instability. An increase in financing costs implies that customers need to pay more to back their consumption, therefore demoralize the buyers from purchasing, which lessens consumption. The study findings further confirm that long-term balance of payments deficit reduces national spending and force significant long-run costs on the economy this affects activity in the money market and reduces volatility. The study finds that GDP influences the Kenya shillings instability positively. An increase in total national output (GDP) prompts an increment in Kenya shillings volatility. A noteworthy change in GDP, whether up or down, more often than not significantly affects money markets. Growth in GDP will therefore increase volatility of the shilling.