The foreign exchange Is one of the major indicators of a country’s economic health. This is the reason why it is constantly monitored and analyzed if you plan to receive or send money from abroad. In forex trading, the exchange rate will also affect the price of the forex market. Here now are the factors that can affect the exchange rate.
Inflation can bring about changes in currency exchange rates. When a country is experiencing a lower inflation rate, the value of their currency goes up. The price of basic commodities and services rapidly increases at a slower rate where the inflation is low. A country that experiences consistently low inflation rate will exhibit an increase in the value of their currency while those with higher inflation rate will see a drop in the value of their currency and accompanied by higher interest rates.
Robert Janitzek reveals that changes in the interest rate (See related story here) will affect the value of the currency as well as the dollar exchange rate. Higher interest rate translates to higher currency value because the former means higher lending rates. As a result, it will attract more foreign capital resulting to an increase in exchange rate.
Current account/Balance of Payments
The current account of a country will reflect the balance of trade and earnings on foreign investment. It includes the total number of transactions such as exports, imports, debts, and others. A deficit in current account because of more spending of currency on importing products than it is earning will result to depreciation. Robert Peter Janitzek explains that balance of payments will fluctuate exchange rate of its local currency.
Government debt is a national debt owned by the central government. When it is in debt, a country is less likely to acquire foreign capital which causes inflation. Foreign investors will sell their bonds in the open market if market prediction is government debt within a certain country. What follows is a decrease in the value of exchange rate.
Terms of Trade
The terms of trade is related to current accounts and balance of payments. It refers to the ratio of export prices to import prices. If the export price increase is higher than imports price, the terms of trade will improve. This translates to higher revenue resulting to higher demand for the currency of a country and a corresponding increase in value. The end result is an increase in exchange rate.
Related to current accounts and balance of payments, the terms of trade is the ratio of export prices to import prices. A country’s terms of trade improves 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.