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Factor Affect Currency Value

Foreign exchange rates are determined by several economic factors that provide insight into a country's economic health and stability. The exchange rate represents the rate at which one country's currency can be converted into another's and fluctuates daily based on supply and demand forces in the currency markets. Understanding what influences exchange rates such as inflation rates, interest rates, current accounts, government debt, terms of trade, political stability, recessions, and speculation is important for those sending or receiving money internationally to get the best rate. Staying up-to-date on these factors can help identify optimal times to transfer money across borders.

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58 views

Factor Affect Currency Value

Foreign exchange rates are determined by several economic factors that provide insight into a country's economic health and stability. The exchange rate represents the rate at which one country's currency can be converted into another's and fluctuates daily based on supply and demand forces in the currency markets. Understanding what influences exchange rates such as inflation rates, interest rates, current accounts, government debt, terms of trade, political stability, recessions, and speculation is important for those sending or receiving money internationally to get the best rate. Staying up-to-date on these factors can help identify optimal times to transfer money across borders.

Uploaded by

shibashish Panda
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Foreign Exchange rate 

(ForEx rate) is one of the most important


means through which a country’s relative level of economic health is
determined. A country's foreign exchange rate provides a window to
its economic stability, which is why it is constantly watched and
analyzed. If you are thinking of sending or receiving money from
overseas, you need to keep a keen eye on the currency exchange
rates.
The exchange rate is defined as "the rate at which one country's
currency may be converted into another." It may fluctuate daily with
the changing market forces of supply and demand of currencies
from one country to another. For these reasons; when sending or
receiving money internationally, it is important to understand what determine
1. Inflation Rates
Changes in market inflation cause changes in currency exchange rates. A country with a lower inflation rate than
another's will see an appreciation in the value of its currency. The prices of goods and services increase at a slower
rate where the inflation is low. A country with a consistently lower inflation rate exhibits a rising currency value while
a country with higher inflation typically sees depreciation in its currency and is usually accompanied by higher
interest rates
2. Interest Rates
 
Changes in interest rate affect currency value and dollar exchange rate. Forex rates, interest rates, and inflation are
all correlated. Increases in interest rates cause a country's currency to appreciate because higher interest rates
provide higher rates to lenders, thereby attracting more foreign capital, which causes a rise in exchange rates
3. Country’s Current Account / Balance of Payments
 
A country’s current account reflects balance of trade and earnings on foreign investment. It consists of total number
of transactions including its exports, imports, debt, etc. A deficit in current account due to spending more of its
currency on importing products than it is earning through sale of exports causes depreciation. Balance of payments
fluctuates exchange rate of its domestic currency.
4. Government Debt
 
Government debt is public debt or national debt owned by the central government. A country with government debt
is less likely to acquire foreign capital, leading to inflation. Foreign investors will sell their bonds in the open market if
the market predicts government debt within a certain country. As a result, a decrease in the value of its exchange
rate will follow.
5. Terms of Trade
 
Related to current accounts and balance of payments, the terms of trade is the ratio of export prices to import
prices. A country's terms of trade improves if its exports prices rise at a greater rate than its imports prices. This
results in higher revenue, which causes a higher demand for the country's currency and an increase in its currency's
value. This results in an appreciation of exchange rate.
6. Political Stability & Performance
 
A country's political state and economic performance can affect its currency strength. A country with less risk for
political turmoil is more attractive to foreign investors, as a result, drawing investment away from other countries
with more political and economic stability. Increase in foreign capital, in turn, leads to an appreciation in the value of
its domestic currency. A country with sound financial and trade policy does not give any room for uncertainty in
value of its currency. But, a country prone to political confusions may see a depreciation in exchange rates.
7. Recession
 
When a country experiences a recession, its interest rates are likely to fall, decreasing its chances to acquire foreign
capital. As a result, its currency weakens in comparison to that of other countries, therefore lowering the exchange
rate.
8. Speculation
 
If a country's currency value is expected to rise, investors will demand more of that currency in order to make a
profit in the near future. As a result, the value of the currency will rise due to the increase in demand. With this
increase in currency value comes a rise in the exchange rate as well.
 
Conclusion:
All of these factors determine the foreign exchange rate fluctuations. If you send or receive money frequently, being
up-to-date on these factors will help you better evaluate the optimal time for international money transfer. To avoid
any potential falls in currency exchange rates, opt for a locked-in exchange rate service, which will guarantee that
your currency is exchanged at the same rate despite any factors that influence an unfavorable fluctuation.

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