What causes differences in currency exchange rates?
What causes differences in currency exchange rates? You may all understand that if you have US $1 in another nation it may need to be changed for you to use it. The amount may be more or less than a dollar after converting into a local currency. That is the normal procedure all along.
The rate at which a national’s currency is converted into another foreign currency is called currency exchange rate
This exchange rate is influenced by many factors including supply and demand.
Currency exchange rate is important as it measures a national’s economical level after comparing its currency with the major world currencies. For that reasons economist of each nation work hard to make sure their currency is doing better. That is where value of money comes in. if your currency has less value in terms of foreign exchange then you tend to use more money on an item if it is priced in another great foreign currency. These exchange rates change daily.
Therefore, any step to sending or receiving money to or from abroad should have a proper decision. You may end up spending more on a transaction than if it was done the other day.
Because we all deal with money, I think it is important to know the elements that influence the exchange rate of a currency.
Depending on the element negative or positive are the only options. So, your duty is to make sure you are contributing to a positive exchange rate. That is to say putting your currency in a better position.
A. Import-Export balance
This is one of the most influential elements explaining the differences in currency exchange rates.
If your nation has a lot of goods to export to a certain nation it means you will have more currency from where your goods are being sent. That will mean more availability of the currency from that country making it less expensive when exchanging with your currency. The opposite happens when you have more imports from a certain nation. More imports from a nation will mean putting its currency on high demand. You will be required to have more money to buy or exchange with that country’s currency.
B. Inflation Rates
Changes in market inflation cause changes in currency exchange rates. A country with a lower inflation rate than another’s will see an appreciation in the value of its currency. The prices of goods and services increase at a slower rate where the inflation is low. A country with a consistently lower inflation rate exhibits a rising currency value while a country with higher inflation typically sees depreciation in its currency and is usually accompanied by higher interest rates
C. Interest Rates
Changes in interest rate affect currency value and dollar exchange rate. Forex rates, interest rates, and inflation are all correlated. Increases in interest rates cause a country’s currency to appreciate because higher interest rates provide higher rates to lenders, thereby attracting more foreign capital, which causes a rise in exchange rates
D. National’s Balance of Payments
A country’s current account reflects balance of trade and earnings on foreign investment. It consists of total number of transactions including its exports, imports, debt, etc. A deficit in current account due to spending more of its currency on importing products than it is earning through sale of exports causes depreciation. Balance of payments fluctuates exchange rate of its domestic currency.
When a country experiences a recession, its interest rates are likely to fall, decreasing its chances to acquire foreign capital. As a result, its currency weakens in comparison to that of other countries, therefore lowering the exchange rate.
F. High nation’s debt
Government debt is public debt or national debt owned by the central government. A country with government debt is less likely to acquire foreign capital, leading to inflation. Foreign investors will sell their bonds in the open market if the market predicts government debt within a certain country. As a result, a decrease in the value of its exchange rate will follow.
G. Nation’s trade policy
Related to current accounts and balance of payments, the policy of trade is the ratio of export prices to import prices. A country’s terms of trade improve if its exports prices rise at a greater rate than its imports prices. This results in higher revenue, which causes a higher demand for the country’s currency and an increase in its currency’s value. This results in an appreciation of exchange rate.
What causes differences in currency exchange rates?
H. Economic performance
A nation’s economic performance can affect its currency strength. A country with less risk for economical break down is more attractive to foreign investors, as a result, drawing investment away from other nations with more economic stability. Increase in foreign capital, in turn, results into an appreciation in the value of its domestic currency. A nation with great financial performance provide encouragement to foreign investor without any doubt about the currency.in turn that will accelerate the inflow of other foreign currencies in the nation.
political violence may cause lack of peace in a nation. no foreign investor would like to invest their precious money in a violent country. therefore no inflow of foreign currencies. low foreign currencies in a nation will create higher demand for other currencies thereby increasing the exchange rates.The same political violence will lead to poor economy of the country hence less trades in the nation.Money flows into a nation with good economic performance. poor economy low influx of foreign currencies into that nation. What causes differences in currency exchange rates
These elements determine the foreign exchange rate fluctuations. If you send or receive money frequently, being up-to-date on these elements will help you better evaluate the optimal time for international money transfer. To avoid any potential falls in currency exchange rates, opt for a locked-in exchange rate service, which will guarantee that your currency is exchanged at the same rate despite any element that influence an unfavorable fluctuation.]]>