8 Important Factors Affecting Exchange Rates

Exchange rate is one of the most important ways of understanding a country’s economic situation relatively. The exchange rate of a country’s currency provides information about the economic stability of that country; therefore it is something that is constantly controlled by every country. If you intend to send money abroad, take money from abroad or invest, you should pay attention to the currency of the country.

To put it simply, the rate used to convert one country’s currency into another is expressed as the exchange rate. The exchange rate may change on a daily basis with the supply and demand force to that currency. Therefore, it is necessary to know what determines the exchange rate when exchanging money with foreign countries.

In this article, we will try to help you to understand what influences exchange rates by examining the factors that determine the variations and fluctuations of the exchange rate and looking at what causes the fluctuations.

1.Inflation Rates
Changes in market inflation also affect exchange rates. The currency of a country with low inflation rates is worth more than the currency of a country with high inflation rates. If inflation is low, the price of goods and services rises more slowly. The value of the currency of a country that keeps inflation rates constantly low will increase, the exchange rate of a country’s currency with high inflation rates will fall and this will bring high interest rates.

2.Interest rates
The change in interest rates affects the value of the currency and the dollar rate of the country’s currency. Forex rates, interest rates, and inflation are interrelated. Increases in interest rates will attract foreign investors as they give better return rates, so that more foreign currency will enter the country and the currency of this country will increase.

3.Country’s Current Account and Balance of Payments Balance Sheet
The current account of the country reflects the trade balance of the country and the money earned from foreign investment. Current account includes all kinds of transactions such as export, import and debt. Due to higher imports than exports, deficits in the current account will cause the country’s currency to fall in value. Therefore, the balance of payments balance affects the exchange rate of the local currency.

4.Public debt
Public debt is the debt of the state governing a country. Inflation occurs because foreign exchange inflows to a country with high public debt will be less. If forecasts show that a country will become indebted, foreign investors sell their bonds in the open market. As a result, the exchange rate of the country’s currency falls.

5.Terms of Trade
The terms of trade, which is a concept related to the current account and the balance of payments, is the ratio of the country’s import and export prices. The terms of trade of a country increase as the price of exported products increases faster than the price of imported products. This leads to more gains, hence a consistent currency, and hence the appreciation of the currency. This raises the exchange rate.

6.Political Stability and Performance
The political situation and economic performance of a country also affect the strength of the currency. Countries with low risk of political turmoil are more attractive to foreign investors. Therefore, the potential of foreign investment tends to turn to countries where political stability is more robust. The increase in the foreign currency in the country leads to an increase in the value of the local currency of the country. A country with healthy trade policies leaves no room for doubt about the value of the currency. However, the exchange rates of a country pregnant with political turmoil will fall.

7.Recession
When a country experiences a recession, interest rates are likely to fall and the chances of foreign capital entry into the country are likely to decline. Thus, when a country enters a recession period, interest rates will decrease and foreign currency inflow to the country decreases. As a result, the local currency weakens and the exchange rates fall.

8.Speculation
If the value of a country’s currency is expected to increase, the demand for that currency will increase due to its profit potential. As a result, the value of the local currency increases and the country’s local currency gains value. Otherwise, if there is an expectation that the value of the country’s currency will decrease, the value of the local currency decreases and the country’s currency depreciates.

As a result, we have listed the most important factors that caused the exchange rate fluctuations above. Knowing the current state of these factors will help you find the best time for your planning. You should be aware of the effects of these factors that affect exchange rates.