Currency exchange rate is unquestionably a very powerful barometer to gauge the financial health of the nation. But, it’s also a very crucial element concerning how nations relate with one another. To put it differently, currency exchange rate is also a factor that determines the global or international affairs between the countries in addition to foreign currency prices.
It’s because of all these reasons, these prices are center of their focus day in and day out with all kinds of media. This way, higher foreign exchange prices can possibly lower the country’s balance of trade, whereas the lower one can raise it. Following are some factors that determine affect currency exchange rate:
1. Inflation: In a globalized world, when there are continuous changes in economic and political decisions, one of the consequences of these fluctuations is inflation. If the nation has reduced inflation rate, its money has higher market value and attracts higher foreign currency prices. Unlike this, countries which have higher inflation rates, the currency rates depreciate on the market.
2. The economists say that countries like Japan, Germany, and Switzerland belong to the category of countries that had reduced inflation rates during the last half of the 20th century, while it was only in later part of the century which U.S. and Canada were able to attain low inflation.
3. This way, interest rates constantly change and influence inflation and money values. Ordinarily, a currency becomes immensely benefited by higher interest rates as it provides the higher return to creditors consequently attracting foreign funds and making the money exchange rate climb up. In an opposite movement, lower interest rates induce the money stoop and making the exchange rate reduced as well.