Factors That Influence Foreign Currency Exchange Rates

Aug 7, 2017
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The foreign exchange market remains active around the clock and millions are traded every minute in different currency pairs. The foreign exchange rate is also commonly known as the Forex rate and is widely regarded as one of the most crucial metrics through which a country’s economic health can be determined. The foreign exchange rate of any country could provide an insight into whether the country is undergoing a period of economic volatility or stability and that’s one of the main reasons why most national economists closely follow the variations in a country’s foreign currency rates.

For people who constantly have to send or receive foreign currency overseas, it’s also very important to keep an eye out on the currency exchange rates. If you are a regular when it comes to sending or receiving money from abroad, you might have noticed that the exchange rate quoted by your foreign currency exchange is usually different every time that you visit. That’s because the foreign currency exchange rates tend to vary based on a variety of factors. Here are some of the main factors that greatly influence the rates of foreign currency exchanges.

Inflation Rates

The inflation rate within a country could have a major impact on the foreign exchange rates of a country’s currency. For example, a country that has a lower inflation rate will eventually see an increase in the value of its currency in the international markets. That’s because the prices of goods and services offered within the country increase much more slowly if the rate of inflation is kept as low as possible. On the other hand, if a country has a higher inflation rate, prices of goods and services will be much higher and this means that the value of currency would fall.

The Balance of Payments

The current account of a country basically shows the balance of payments that the country has generated on its foreign investments. It includes all of the transactions made by the company such as exports, imports, debts paid, debts taken, and others. If there’s a huge deficit in the balance of payments, which is usually caused when a country is importing more goods and has minimal exports, then the foreign currency rates will fall.

Interest Rates

The interest rates set by the Central Bank will also affect the foreign exchange rate. If the interest rate increases over time, the country’s currency will also begin to appreciate due to the higher rates of interest that are offered to lenders. It won’t be long before the country starts attracting more foreign capital as lenders look for surefire ways to multiply their investments.

Government Debt

The amount of debt owed by the central government also affects the foreign currency rates. If a country’s government owes more money to its people or to other countries, most other foreign countries would be loath to give their money to that government and that could have a negative impact on the country’s foreign currency rates.

 

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