Forex Rates Today
Why Forex Exchange Rates Affected?
Inflation Political Stability & Performance Country’s Current Account Deficits Interest Rate Government Debt Recession
Inflation As a general rule, a country with a consistently lower inflation rate exhibits a rising currency value, as its purchasing power increases relative to other currencies. The prices of goods and services increase at a slower rate where the inflation is low. Those countries with higher inflation typically see depreciation in their currency in relation to the currencies of their trading partners. This is also usually accompanied by higher interest rates.
Political Stability & Performance
A country's political state and economic performance can affect its currency strength. A country with less risk for political turmoil is more attractive to foreign investors, as a result, drawing investment away from other countries with more political and economic stability. Increase in foreign capital, in turn, leads to an appreciation in the value of its domestic currency.
Countryâ€™s Current Account Deficits
A countryâ€™s current account reflects balance of trade, earnings on foreign investment and its trading partners, reflecting all payments between countries for goods, services, interest and dividends. The excess demand for foreign currency lowers the country's forex exchange rate until domestic goods and services are cheap enough for foreigners, and foreign assets are too expensive to generate sales for domestic interests.
Changes in interest rate affect currency value and dollar exchange rate. Forex rates, interest rates, and inflation are all correlated. By manipulating interest rates, central banks exert influence over both inflation and exchange rates, and changing interest rates impact inflation and currency values.
Countries will engage in large-scale deficit financing to pay for public sector projects and governmental funding. While such activity stimulates the domestic economy, nations with large public deficits and debts are less attractive to foreign investors. The reason? A large debt encourages inflation, and if inflation is high, the debt will be serviced and ultimately paid off with cheaper real dollars in the future.
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.
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Published on Nov 30, 2016
A country's forex exchange rate provides a window to its economic stability, which is why it is constantly watched and analyzed. If you are...