Exchange Rates And The Common Factors That Influence Them

By Author: Jodie Elliot
Total Articles: 2
Comment this article

Apart from the factors like inflation and interest rates, exchange rates are one of the very important factors which determine the relative economic health level of a country. They play a fundamental role in a country's trade level, which is crucial to most economic market all over the world. Because of this, exchange rates are included in the most analyzed, watched and governmentally controlled economic measures. Listed below are the most common exchange rates determinants and the factors related to the different trading relationships of two countries.
Inflation Differentials. In general, a country with consistent low inflation rate usually exhibits a rising value in currency since its buying power raises in relation to other currencies.

Interest rates Differentials. Exchange rates, inflation and interest rates are all extremely correlated. Through interest rates manipulation, central banks could exert their power over both exchange rates and inflation; interest rates that change impact currency values and inflation. High interest rates give lenders an increased return which is relative to other nations. Simply ...
... put, higher interest rates draw foreign capitals which in turn can cause the rise of exchange rates.

Deficits of Current Accounts. Current account is defined as the trade balance between trading partners and a particular country, reflecting every payment between nations for dividends, interest, goods and services. Current account deficit would show that the a particular country spends more on its foreign trade that what it's earning, and also loaning capital from foreign sources to make up for its deficits.

Public Debt. Countries would get involved in deficit financing which are large-scale to pay for projects in the public sector and government funding. Though these types of activity could stimulate the domestic economy of a country, nations with huge public debts and deficits tend to scare foreign investors away.

Trade Terms. A ratio which compares import prices to export prices, trade terms refers to the payments balance and current accounts. If a country's export price rises at a higher rate compared to its imports, this means a favourable improvement in the trade terms. An increase in trade terms shows a higher demand for the exports of the country. In turn, this would result in increased revenues obtained from exports which give increased currency demand and increase in the value of the currency.

Economic Performance and Political Stability. Foreign investors prefer countries which are stable with strong performance in the economy. For example, political turmoil has such a huge impact in the country's currency and capital movement.
As expected, when exchange rates decline, derived capital gains and income purchasing power also decrease. In relation to this, exchange rates has a huge influence over other factors affecting the income, like inflation, interest rates and capital gains derived domestic securities. A number of complex factors also determine exchange rates which also confuse experienced economists. Investors need to have a clear understanding of the nature of exchange rates and currency values and the vital role they play in the return rate of all their investments. http://www.currencysolutions.co.uk