Foreign Exchange(FX or Forex) is the conversion of one country’s currency into another country’s currency at an exact rate that is called the foreign exchange rate. It is the most essential way through which a country’s relative level of economic health is determined.Factors influencing Foreign Exchange rates It may change daily with the fluctuating demand of currencies from one country to another and markets forces of supply.
It is crucial to understand what determines the exchange rate. So this article examines some of the factors that influence the fluctuations and variations in exchange rates and explains the cause behind their volatility, helping you learn the best time to study money abroad.
1-Interest rate
Changes in interest rate affect dollar exchange rate and currency value. Foreign exchange rates, interest rates, and inflation are all correlated. Increases in interest rates cause a country to appreciate as higher interest rates provide higher rates to lenders, thus attracting more foreign capital, which causes an increase in exchange rates.
2-Government debt
Government debt is national or public debt possessed by the central government. A country with government debt is less likely to obtain foreign capital, leading to inflation. Foreign investors will sell their bonds in the open market if the market anticipates government debt with a certain country.
3-Inflation rate
The inflation rates affect a country’s currency value. A low inflation rate ordinarily,
shows a rising currency value, as its purchasing power is getting higher related to other currencies. Contrary, those with high inflation ordinarily see depreciation in their currencies compared to that of their trading partners, and it’s also typically accompanied by higher interest rates.
4-Terms of trade
It is the related difference between a country’s exports and imports. For example, if a country has a positive balance of trade, it means that exports are more than imports. In such a case, the outflow is lesser than the inflow of foreign exchange. When this situation happens, a country’s foreign exchange reserves grow, helping it lower the interest rate, which stimulates economic growth and bolsters the local exchange rate.
5-Political stability
If you see a person is stable, of course, you will trust him more rather than an unstable person. So same with the situation of countries, if the political status of a country is stable, then investors will spend more, and finally, it will influence the forex of the country.
6-Recession
When a country experiences a recession, interest rates will fall, it will also decrease its chances to obtain foreign capital. That’s why its currency weakens, lowering the FX rate.
7-Balance of payment
The current account is also known as the balance of payments. The balance of payment is the overall computation of a country’s relative performance in comparison to other countries. To compute the balance of payments, debts, the total number of exports indeed and other economic factors are calculated.
All these above factors influence the foreign exchange rate. If you receive or send money regularly, you should have proper knowledge of these factors, It will assist you to better evaluate the optimal time for international money transfer.
Written by – Pavitra katyal
