GET TO KNOW THE DETERMINANTS OF EXCHANGE RATES
Get to Know the Determinants of Exchange Rates
Aside from being the most watched movement in the market, the rate of exchange is also one indicator of a nation’s economic health because of its role in trade. For investors, these measures are also a determinant of their returns. However, other than the usual concept of a higher currency rate resulting to costly exports and cheaper imports, what are the factors that influence the ratio of currency swaps?
Low inflation is equivalent to an increase in the value of a currency due to the rise in purchasing power. Likewise, a higher inflation will result to a decline of currency.
This factor is highly related to the first one. Altering this will cause the central banks to exert effort in exchange rates, and will largely impact a currency’s standing as well. A huge interest will inevitably lead to a satisfying return thus, attracting foreign capital causing a hike in the value of currency swaps. However, in some cases wherein one state’s inflation is much larger than the others, the impact of high interest value may might be diminished. The same system also applies to decreasing values.
Current account shortage
Since a current account determines the balance between trading countries and showcase all payments made for goods and services, a deficit in this area will mean that your nation is spending more than what it earns in foreign exchange, and it resorts to borrowing from sources in order to compensate for the loss. This reduces your rate of exchange until your offerings are affordable enough for other states.
A nation with a large debt is unattractive to foreigners. Why? Debts give rise to inflation, and a high inflation will cause the debt to be compensated with cheaper dollars.
These compare the cost of imports from exports and is relative with current accounts as well as balance of payments. Positive terms of trade are caused by an increase in the prices of exports more than its imports. This will result to a raise both in revenue and demand for currency.
Among the attributes considered by foreign investors is economic performance. This is highly affected by political stability, as having constant turmoil lures investment funds away and closer to those who poses lower risks in terms of politics. Uncertainty in this sector will also take a toll on currency in terms of confidence and capital movement.
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