The exchange rate is described as the rate at which one national currency is exchanged for another. Here are six factors that impact the exchange rate of a country:
1. Inflation Rates
You need to be aware that the rate of inflation of a particular country is likely to affect its currency value. For instance, when the inflation rate is low, the currency value will rise, and its buying power increases with respect to other countries ‘ currencies.
On the other hand, when the inflation rate increases, the currency value will depreciate while the interest rate increases. Government debt can also have an impact on the rate of inflation. A country that has government debt is less expected to get foreign capital, thereby causing inflation.
2. The Economic Strength and Monetary Policy of a Country
You find that on most occasions, investors are likely to invest in a country that has a background of a stable monetary policy and good economic performance. Thus, increasing the country’s demand and its currency value.
It is important to note that during this time of writing, the world is battling a significant pandemic, the covid-19. The economy is experiencing a universal slowdown, and there may be worries of recession. Hence, this would lead to a decrease in the exchange rate because the interest rate also depreciates simultaneously.
3. Interest Rates
Inflation rates, interest rates, and exchange rates are interrelated. You will observe that when a country’s interest rates increase, it will cause an appreciation in its currency as lenders are usually offered higher rates, thus attracting extra foreign capital. Therefore, leading to the rise in the worth of a country’s currency and its exchange rate.
Nevertheless, when you cut down the interest rate, you will cause a depreciation in the money’s value. It would be best to consider using an exchange rate calculator to convert common currencies to accurate exchange rates.
4. Geopolitical Stability
You are likely to observe that political stability, together with economic strength, can affect a country’s currency value. For instance, investors are more likely to invest in a country with an excellent political stability state, thus appreciating its national currency’s worth from the investors’ foreign capital. On the other hand, you find that investors tend to flee from countries with political instability, thus lowering its currency value.
5. Export and Import Value
You should be aware that a county’s balance of payments outlines all financial transactions and international trade made by government bodies, companies, and individuals of that specific nation. These transactions usually consist of the importation and exportation of goods, capital, and services.
When a country’s terms of trade are improved, the ratio of its exports will be higher than of its imports. Thus, leading to demand for the country’s export, thereby increasing the value of its currency. Nevertheless, when the rate of its imports increases, the demand rate, and the currency value will, in turn, decrease.
You have now understood what affects the exchange rate and how it can be controlled by reading this. Therefore, you should follow the guidelines on increasing exchange rates to increase your country’s currency value.