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What Causes a Currency Exchange Rate to Appreciate?
When buying foreign currency, it’s important to make sure you get the most for your money. This means, you’ll want to know and understand what it means for a currency exchange rate to appreciate. When currency appreciates, it means that one currency is stronger than another. For example, when the Euro has appreciated, it is stronger than the U.S. dollar and vice versa. And as the demand grows, it continues to strengthen that particular currency.
Before buying currency and when doing your research, it’s important to know what causes a currency exchange rate to appreciate. Some of those reasons can include increases in competitiveness, interest rates, and higher economic growth. Other things to consider are inflation, speculation and expectation, as well as surplus funds and the impact of bought domestic currency.
Supply and Demand
An increase in demand can cause interest rates to rise causing people to hold on to their money which can cause appreciation. As investors speculate and if they think a currency will appreciate, their speculation can cause interest rates to rise. One of the more important reasons currency might appreciate is because of higher economic growth. As the country sees economic growth and interest rates rise, it can make the currency stronger; which can lead to an increase in spending and exports.
Impact of Appreciation
If an exchange rate increases in value, it depends on a number of factors including economic growth, competitiveness when importing and exporting, and the rate of inflation. As an economy becomes more competitive, then a currency appreciation is a good thing. But, if the competitiveness is based on speculating about a weaker economy, then a strong currency can fall short.
Effects of Economy and Government on Appreciation
Similarly, if an economy is in recession, then appreciation causes the currency to weaken and if the economy is booming, appreciation can reduce help reduce inflation leading to higher employment rates and therefore, more spending, increasing the strength of the foreign currency.
Though investors and economies set the tone for currency exchange appreciation rates, sometimes appreciation can be impacted by governments themselves through balance of payments, government debt, or government intervention. Countries who have difficulty getting enough capital may find that their currency doesn’t appreciate. But, if the value of imports is greater than the exports, then it can contribute to higher economic growth. Knowing what causes a currency exchange rate to appreciate is something to consider when deciding the best time to buy foreign currency.
At Xchange of America, rates and policies are clearly stated, so you’re never surprised by hidden fees or additional expenses. A convenient conversion calculator lets you see the rate of conversion of the currency you plan to buy. You can buy your currency with a cashier’s check, money order, bank draft, bank wire, or even a credit or debit card. There are no transaction fees, the shipping fees are clearly stated, and the ease of use makes Xchange of America the place to buy foreign currency when you plan your next trip overseas.