Foreign Exchange rate or Forex rate determines a country’s relative economic health and plays a significant role in international trade. A country’s money exchange rate offers a peek into its economic stability. So if you are considering receiving or sending money abroad, you should keep a watchful eye on currency exchange rates.
The exchange rate is “the price at which one country’s currency can be converted into another”. It may change daily based on the supply and demand of money and varies from one country to another. Therefore, it is important to understand the dynamics of what exactly determines exchange rates.
Inflation Rates: Fluctuation or change in market inflation affects currency exchange rates. A country with a lesser inflation rate than another will see an appreciation in its currency’s value. When inflation is low, prices of products and services will also be less. A country which consistently has a lower inflation rate demonstrates a rising currency value and a nation with higher inflation exhibits depreciation in its currency and most often has higher interest rates.
Interest Rates: Changes in interest rates affect currency value and exchange rate. Inflation Forex rates and interest rates are all interlinked. When the interest rates increase, it causes a country’s currency to appreciate because higher interest rates give lenders higher rates, which in turn attracts more foreign capital, and causes a rise in exchange rates.
Recession: A country’s interest rates will most probably fall when it undergoes recession. This will lead to a decreased chance in obtaining foreign capital. Consequently, the currency weakens in comparison to that of other countries, thereby lowering the exchange rate.
Government Debt: Public or national debt held by the central government is government debt. It is less than likely that a country with government debt will obtain foreign capital. This will lead to inflation. If the market foresees government debt within a country, foreign investors will sell their bonds in the open market, thus causing the value of its exchange rate to decrease.
Political Stability & Economic Performance: A country’s currency strength is largely affected by its political state and economic performance. Foreign investors are attracted to countries with less risk for political chaos. Increase in foreign capital leads to an appreciation in the value of its domestic currency. On the contrary, a country that experiences political confusions may see decrease in exchange rates.
Speculation: If a country’s currency value is expected to increase, investors will demand more of that currency in order to make a profit in the near future. Due to the increase in demand, the value of the currency will rise. This rise in currency value increases the exchange rate as well.
All of these above mentioned factors decide the fluctuations in the foreign exchange rate. If you are someone who sends or receives money often, being up-to-date on these factors will help you assess the most favorable time to transfer money.