4 Factors that Affect the Exchange Rate of Currencies
Author: Persica Exchange
Currency exchange rates are the most observed and highly analyzed economic measures all around the world. It is a major indicator of a country’s economic progression. The exchange rates are not only important to administrations and big market players, but they matter a lot on a smaller level too. Many people invest money in buying a foreign currency at a lower rate and then sell it when its price rises in the market.
If you want to buy foreign currency online, here are the main factors that can affect the exchange rate of currencies significantly.
- Inflation Rates: Inflation can cause significant changes in the exchange rate of a currency. In simple words, a country that has a lower rate of inflation will surely see an appreciation in its currency’s value. When inflation is low, the prices of various goods and services increase gradually. Countries with a constant lower rate of inflation exhibit an amazing expansion in its currency’s value, however, a country where the inflation rate is higher; its currency’s value is low.
- Rates of Interest: It is mainly connected with inflation rates. The central bank of any country can affect the inflation and exchange rates easily by adjusting the rates of interest. Higher interest rates signify more returns. Therefore, increase in interest rates show that the currency of that country will get more value and more value will notably affect the exchange rates. While buying foreign currency online, do not forget to check the prevailing interest rates.
- Political State and Performance: Political stability and economic performance of a country can influence the strength of its exchange. A country that has a lower risk of political conflict is able to attract more foreign investors by reducing the risk of its economy. When foreign capital requirements increase, the currency will receive the better value. Countries those are prone to more political tensions and conflicts are more likely to see depreciation in its currency’s value. When currency value gets affected, the exchange rates will also be affected for sure.
- Government Debt: It is also known as national debt or public debt which is handled by the central government. Countries with huge public or national debts and deficits are less attractive and beneficial to the foreign investors. Less interest from foreign investors will lead a slower growth of the economy. When foreign investors started predicting a hike in government debt, the value of that country’s currency will definitely decrease in the market. As a result, the exchange rate will also go down.