Some factors, such as interest rate and inflation, are critical in determining a country’s relative level of economic health. Exchange rate, which is the ratio of conversion of one country’s currency to another, is also vital because it affects the level of trade of a nation. Trade plays a very significant role in any free-market economy across the globe. Due to this reason, the exchange rate is among the most closely watched, analyzed, and most influenced measure of economic health.
The exchange rate also has an impact on individuals since they are the players in the trade and investment both locally and internationally. It affects their returns from investment. Moreover, when one is traveling, they need to be aware of the exchange rate of their home country currency to that of their destination country. Currency converter can help you know the exchange rate as you travel or import things from other countries, thus work out how much of your country’s currency you need.
But what are some of the factors that influence the exchange rate? Read on for a look at several of them.
Inflation
When the inflation rate of one country, say the UK, is lower than that of another, especially a key trading partner, then exports from the UK will be more competitive. The result of that is an increase in demand for the currency of the country with lower inflation.
Taking the example of the UK, the demand for the sterling pound would rise, to facilitate the purchase of UK products. In the same manner, foreign goods will be less competitive, and UK nationals will buy lesser quantities of those goods. The country with lower inflation tends to realize a rise in the value of their currency hence making its exchange rate go up.
Political Stability and Economic Performance
A country with few or no political unrest is likely to perform well economically, and this will have an impact on its currency. Such a state will tend to attract massive foreign investment as investors shy away from putting their resources in countries perceived to be politically unstable and as risky economically. The high inflow of investors will make the country’s exchange rate to appreciate.
Interest Rates
There is a close correlation between inflation, interest rate, and exchange rate. Governments through central banks can cause changes in exchange rates by playing around with interest rates. With higher interest rates, lenders are assured of better returns than in other countries. The effect of the attractive returns is attracting foreign capital, which consequently causes the exchange rate to increase significantly.
With the understanding of the above factors and others, you can know what direction the exchange rate may take after some events in the country thus plan accordingly.
