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More Key Factors that Influence Currency Exchange Rates
Currency exchange rates are influenced by a wide range of factors that can cause dramatic shifts in the value of a particular currency. One primary example is the recent effect that Brexit had on the British pound. The pound dropped to values that haven’t been since in over 30 years after the news of Brexit occurred, and both global and local markets in the UK felt the impact as well. The effect that this had on the value of the pound had much to do with perception and a loss in investor confidence more than anything else, but perception is precisely one of the major factors that influence a currency exchange rate for a particular country.
Investor confidence can be quickly lost or gained
A country’s political and economic stability have a dramatic impact on the currency exchange rate for its particular currency. As it was seen with the recent Brexit vote, the political and economic turmoil that occurred in the days afterward had a dramatic impact on the value of the pound, which dropped significantly, and one reason this occurred was a loss of investor confidence in UK stocks and the pound. Investors sold shares in large quantities, and it’s estimated that the resulting share selloff cost stockholders trillions of dollars, and simultaneously the value of the pound significantly shifted.
Other factors that influence a currency exchange rate
Some of the other factors that have been previously mentioned on this blog include government debt, recessions or economic booms, interest rates, a country’s balance of payments, terms of trade and many others. When countries go through recessions, their currencies often weaken as their chances to acquire foreign capital diminish. The terms of trade of a country include the ratio of export prices to import prices. The terms of trade of a country improve of its export prices rise faster than its import prices, and that can have a positive effect on a particular currency. Also, countries with a large amount of debt may not be able to acquire foreign capital as easily and as a result their currency may decline in value.
A lower currency exchange rate is not always bad
Although a lower currency exchange rate for a particular country may seem like it’s always a bad thing, this is not necessarily true. When a country’s currency exchange rate drops, it can be bad for citizens of that country in terms of traveling to another country. Their purchasing power declines, and they aren’t able to buy as many goods and services as they used to. However, it makes traveling to that particular country more attractive for tourists from other countries, as their local currencies become stronger. This can increase tourism to a particular area, and it can also make a country’s exports more attractive to foreign buyers, all of which can have a net positive long term effect on a particular economy. However, if a currency drops too low, it can have dramatic effects on the lives of the residents of a particular country, as their purchasing power to buy local goods can also diminish.