Some Factors of Exchange Rate

The exchange rate is the heavily used terms that imply the rate in which one particular currency can exchange for any other kind of currency. The rate is not static rather it changes drastically on the global foreign exchange markets, it is where every kind of currency is traded. Some of the most traded currencies are the euro, the US dollar, the pound sterling, and Japanese yen.

Various factors are responsible for the determination of exchange rates and these have relation with the specific trading relationship between the two countries. One should remember that exchange rates are usually relative and they are expressed in a form of comparison of two countries’ currencies. Some determinant factors of the exchange rate are discussed below. There are no particular orders for these discussed orders and it is a matter of debate to analyze these factors’ relative importance.

Inflation: According to one general rule, a constant lower inflation rate helps in raising the currency value because its purchasing power enhances relative to the other currencies. In 20th century’s last half, some countries have achieved a low inflation, such as Germany, Japan, and Switzerland. The U.S. and Canada have achieved the low inflation later only. The countries with higher inflation usually experience their currency depreciation in the relation to other currencies in their trading partners. It is generally accompanied by the higher rates of interest.

Interest Rates: Inflation, interest rates, and exchange rates are related with one another. With the manipulation of interest rates, the central banks apply influence on both exchange rates and inflation. The changing interest rates affect currency values and inflation.

Deficits of Current-Account: The current account implies the balance of trade between the country along with its trading partners. It reflects all the payments between the countries for services, goods, dividends, and interest. The term ‘deficit’ in the current account implies that the particular country is consuming more on the foreign trade in comparison of its earning amount and also that country is borrowing a capital from the foreign sources for making up the specific deficit. That means the country needs more foreign currency in comparison what it has received from the sales of exports. It has supplied its own currency more than the demand of the foreigners for its commodity.

Some other factors are Public Debt, Terms of Trade, Economic Performance and Political Stability etc. If you want to know more details about the money exchange rate, then visit the link

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