vickymacklean
New Member
A few important factors affecting the foreign exchange rate are discussed below:
1. Inflation rates: A country’s inflation rate greatly affects the currency exchange rates. A country with a lower inflation rate will see an appreciation in the value of its currency. The prices of goods and services of this country will increase at a slow rate. On the other hand, the country with a high inflation rate will undergo depreciation in the value of currency. Although the interest rates are higher in the latter case.
2. Interest Rates: Fluctuations in interest rate, affect both forex and inflation rates as all the three rates are correlated. When a country’s interest rates increase, its currency rate appreciates as higher rates give a higher rate to lenders, which in turn attracts more foreign capital, resulting in a rise in the exchange rates.
3. Current account of the country: A country’s current account is an image of its balance of trade and earnings on foreign investment. A deficit in the country’s account may arise when more of the country’s currency is spent on acquiring imported products, rather than gaining from selling off exported items. This causes depreciation and in turn the exchange rate of the domestic country is affected.
Government Debt: A country’s central government is under government debt when it carries a burden of public or national debt. If a country faces such debt, its capability to attain foreign capital reduces great fold. If foreign investors predict such debt within a country, they are likely to sell the bonds in the open market, thus increasing supply, resulting in a decrease in the exchange rate.
1. Inflation rates: A country’s inflation rate greatly affects the currency exchange rates. A country with a lower inflation rate will see an appreciation in the value of its currency. The prices of goods and services of this country will increase at a slow rate. On the other hand, the country with a high inflation rate will undergo depreciation in the value of currency. Although the interest rates are higher in the latter case.
2. Interest Rates: Fluctuations in interest rate, affect both forex and inflation rates as all the three rates are correlated. When a country’s interest rates increase, its currency rate appreciates as higher rates give a higher rate to lenders, which in turn attracts more foreign capital, resulting in a rise in the exchange rates.
3. Current account of the country: A country’s current account is an image of its balance of trade and earnings on foreign investment. A deficit in the country’s account may arise when more of the country’s currency is spent on acquiring imported products, rather than gaining from selling off exported items. This causes depreciation and in turn the exchange rate of the domestic country is affected.
Government Debt: A country’s central government is under government debt when it carries a burden of public or national debt. If a country faces such debt, its capability to attain foreign capital reduces great fold. If foreign investors predict such debt within a country, they are likely to sell the bonds in the open market, thus increasing supply, resulting in a decrease in the exchange rate.
