What influences the currency exchange rate?
There are a number of different factors that influence the currency exchange rate, and the rate fluctuates on a daily basis. Because of the fact that the currency exchange rate changes, there may be better times to buy currency than others. At XChange of America, we are familiar with how the currency exchange rate fluctuates, and we can give you expert advice on the best time to buy currency to save the most money. The factors that influence the currency exchange rate can vary from one country to another. Some countries have a currency exchange rate that changes more often than other countries, and some of the factors include the political climate of the country, its current economic strength, and more.
The rate of inflation can influence the currency exchange rate
The rate of inflation for a country can affect its currency exchange rate. Inflation rates can vary dramatically from one country to another. Some countries have a higher rate of inflation, and if they do, their currency value will usually start to decline. Countries with a lower inflation rate usually have a rising currency value, which strengthens their exchange rate. Some of the countries that have had a consistently low inflation rate include Canada, Japan, Germany and the United States, and as a result their exchange rate has been strong in recent times compared to other countries. Any country with a high rate of inflation will see its exchange rate start to decline in comparison to countries with stronger economies.
Interest rates also influence rates
Interest rates are manipulated by central banks in many countries, and the interest rate has a direct effect on the currency exchange rate. When the interest rate is higher, it attracts investors from other countries, and the country’s currency can become stronger. A high interest rate does not always have a positive impact on the exchange rate. A low interest rate can weaken a country’s currency in some cases, and if there is a high interest rate combined with a high inflation rate, the inflation rate can have more of a direct impact on the currency exchange rate, and the currency will be weakened. Other factors can also drive down the value of a country’s currency.
Debt influences the currency exchange rate
A country’s debt is one of the biggest factors that influence the currency exchange rate. If a country has a large public debt, and the debt continues to rise on a yearly basis, it can negatively influence the exchange rate. Countries that keep their public debt low as a proportion to their GDP (gross domestic product) will usually have a strong exchange rate relative to other countries. Countries that have large public debts become less and less attractive to foreign investors, and also when a country’s public debt is large, it usually has a large inflation rate which as previously mentioned will negatively affect the currency exchange rate. All of these are important factors in determining exchange rates but there are even more factors than this such as the political climate, terms of trade, and economy.