Media Blog
Global Factors that Can Influence the Currency Exchange Rate
Several different global factors influence the currency exchange rate for every country daily. You probably already know that currency exchange rates fluctuate very quickly. Actual factors that influence exchange rates are very complicated and numerous, but there are a few factors that have an almost immediate and often noticeable impact on currency exchange rates. As many saw in 2016, political events such as Brexit or the election of a new president or prime minister can have an immediate effect on currency exchange rates and stock market values. However, these are just a few of the major factors that influence exchange rates.
Political stability influences exchange rates
The political stability of any country will have a major impact on its exchange rates. For example, any country that has any type of unstable political setting such as an uprising or violent conflict will often have declining exchange rates. The political turmoil results in other countries losing confidence in that country’s currency. Investments in the country may be deemed to be riskier, as unstable environments are usually correlated with poor economic performance. Societies may be more dangerous to do business in, or more dangerous for consumers, which means that overall trade rates would decline.
Debt has a major influence on exchange rates
Debt also has a major influence on exchange rates, as countries with large amounts of debt will generally have weaker exchange rates. Countries that have large amounts of public debt are less attractive to foreign investors. The currency exchange rate of any country with large debts will generally start to decline over time, if the debts are not paid off in a timely manner. Foreign investors would rather choose countries that are showing signs of GDP growth, as this indicates that their economy is healthy for the short-term future. Large debts also result in large inflation rates which in turn lower the value of a currency significantly.
Central banks influence exchange rates
Central banks have a major influence on currency exchange rates, and they are mainly able to influence them through interest rate manipulation. By increasing interest rates, lenders can receive a higher return compared to other countries, and the country can attract more foreign investors. In some cases, this would result in an increase in currency values, but in other cases it can result in a decrease. Central bank influences can be complicated because high interest rates can be mitigated by increased inflation rates. A decrease in interest rates can result in lower amounts of foreign investment. Central banks will often influence interest rates to also affect import and export businesses. This can be seen in countries like China that have been thought to artificially devalue their currency to maintain a higher level of exports and make their exports affordable compared to other countries.
These are just a few of the many complicated factors that influence currency exchange rates. We provide you with daily updated exchange rates for several major currencies throughout the world. Give us a call today for more information about exchange rates or to ask any questions that you may have.