The 5 factors that influence exchange rates
In this post, we would talk about the five factors that influence exchange rates.
They are as follows:
1. Inflation Rates
Changes in market inflation lead to changes in currency exchange rates. A country with a lesser inflation rate than another’s might find an appreciation in the value of its currency. The prices of goods and services increase at a steady rate where in fact the inflation is low. A country with a frequently lower inflation rate shows a rising currency value while a country with higher inflation usually sees a reduction in its currency and is normally followed closely by higher interest rates
2. Government Debt
Government debt is a national debt or a public debt owned by the central government. A country with government debt is less inclined to obtain foreign capital, resulting in inflation. Foreign investors will sell their bonds in the open market when the market predicts government debt inside a certain country. Consequently, a reduction in the value of its exchange rate will follow.
Whenever your country experiences a recession, its interest rates will probably fall, reducing its chances to get foreign capital. Consequently,, its currency weakens when compared with that of other countries, therefore reducing the exchange rate.
If your country’s currency value is expected to increase, investors will demand more of the currency to be able to make a profit in the near future. Consequently, the value of the currency will rise because of the increase in demand. With this specific increase in currency, value comes to arise in the exchange rate as well.
5. Interest Rates
Another situation to factor in is interest rates across the world. A rise in interest rates in a single country will provide a higher come back to investors than the usual country with a lesser interest rate. More investors are likely to be interested when there is more value to be gained from the currency and which means currency increases in street value.
Who controls the exchange rate?
When a currency is free-floating, its exchange rate is allowed to differ against that of other currencies and is decided by the market forces of demand and supply. Exchange rates for such currencies will probably adjust almost always as quoted on financial markets, mostly by banks, across the world.
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