Understanding Foreign Exchange Rates and the Factors Impacting Them
A country’s currency exchange rate is an essential measure of that country’s level of economic health. Exchange rates are influenced and monitored by the Government of that country. Apart from measuring the health of the country’s economy, exchange rates affect investors’ returns and the country’s level of trade.
Exchange rates can be defined as the rate at which one country’s currency can be exchanged for another country’s cash. The main reason people would like to do currency exchange is to pay for services or even buy goods, and thankfully, there are many sites out there now like BER that can help compare the best exchange rates for your needs.
While we might think that exchange rates only affect the Government and key economic players, they also affect small-scale traders because of their impact on the return on investment. This is most important ever to several people.
Imports and exports are the staples of international trade
A country that conducts a lot of international business might be growing while it might also be negatively influencing its business. This is so because when a country imports more than it exports, it is likely to cause an imbalance of trade and consequently lower its exchange rates in the trading platform hence devaluing its currency.
On the other hand, when a country exports more, there is a high demand for its goods. When demand is high, the product prices will likely increase, leading to that country’s currency value appreciating. Having understood how currencies appreciate and depreciate, let’s look at factors that impact forex exchange rates.
The political stability of a country
A politically stable country has an excellent environment for foreign investments and the other way around. This affects the economic performance of that country because with foreign investors coming in, foreign capital increases in the country hence the high demand for that country’s currency.
This results in the appreciation of the local currency. Apart from increasing the value of the money, the country can reduce the chances of fluctuating values because of the strong trade policies.
Speculation
Depending on a country’s economic performance in the recent past, people can predict what is likely to happen shortly. When investors are expecting the currency of a particular country to appreciate, they will all be trying to buy more of this currency. With the increase in demand in that currency, its prices increase, increasing its exchange rates. However, as the word speculation says, they are unsure of the prediction, and the positive outcome is not always guaranteed.
Debt owed by the Government
Like exports and imports, the influence of a country’s debt is the same. When a government has so much debt, it reduces its opportunity of attracting foreign investors. Those already invested in the country will sell their bonds to avoid the effects of inflation caused by too much borrowing.
This, in turn, will lead to many people selling this country’s currency hence an oversupply in the market. When there is too much of something in supply than its demand, the product’s prices tend to decrease. This being the case, the currency’s price decreases, hence a decrease in its exchange rates.
A country’s terms of trade
When a country has very favorable international trade terms, it tends to attract more buyers for its products, leading to an increase in exports. Higher revenues will be higher if the Government can maintain a lower import price than its export price. The country’s currency is in higher demand hence an increased value and exchange rates.
Borrowing interest rates
The key player in this is the central bank. A country with higher interest rates can offer a higher return to lenders. This will attract foreign investors causing the exchange rates to increase due to increased demand for the currency.
Conclusion on Foreign Exchange Rates
As we can see, exchange rates are influenced by many factors in the economy, and while it might be challenging to understand them, investors should always be on the lookout for them. Understanding the relationship between currency values and exchange rates on the trading platform will significantly impact their investment return.
