Key Factors that Affect Foreign Exchange Rates

When traveling overseas, we are always on the lookout for areas or establishments where we can get the best currency exchange rates. In general, there really is no best way to exchange money. It’s just a matter of finding a reputable establishment that offers competitive rates. Also, there are several key factors that affect foreign exchange rates.

Exchange rates does not only affect travelers but also businesses

For companies, understanding these factors can help them mitigate potential risks that can have an impact to their operations.

Exchange rates play a significant role not only for travelers but also on businesses. To get the best foreign exchange rates, we need to know the main factors that affect them. For companies, understanding these factors can help them mitigate potential risks that can have an impact to their operations. In this article, let’s take a look at some of these key factors:

Inflation

In general, the lower the inflation rates are in a country, the higher the value of its currency.

Interest rates

These affect foreign exchange rates in the sense that if a country has higher interest rates, it can mean that investors get better returns. This leads to higher-value currency of a country.

Unemployment rates

Even the number of people who have no jobs affects foreign exchange rates. How? If a country has a high unemployment rate, the Central Bank may reduce the interest rates so as not to be an extra burden to an economy that is already facing financial issues.

Stability and economic growth

Investors also look at the level of political stability and economic growth (or lack thereof) of a country. If it posts strong and stable economic growth, currency valuations tend to be stronger.

Account deficit

This means that a country has higher spending (through imports) than earnings (through exports). If this is the case, it needs to get a loan from other countries to pay off the deficit. When that happens, the currency valuations become weak.

Terms of trade

This refers to the price difference of exports and imports. If a country’s exports get a higher price than the price it pays for imports, it is a positive terms of trade, which leads to stronger currency valuations.

Public debt

The level of public debt affects foreign exchange rates in the sense that if a country has large budget deficits and borrows money to pay these off, inflation will tend to rise, which leads to weaker currency valuations.

Do you know other factors that affect foreign exchange rates of a country? Share your ideas in the comments section.

About the author  ⁄ Marxa Dillan

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