Exchange rates are one of the most important factors that determine the economic health of any country. The exchange rate is defined as the rate at which the currency of a particular country might be converted into other currency. The exchange rates might affect individuals and organizations on a smaller scale and could have a substantial impact on the real returns of any investor’s portfolio.
There are several factors that affect the movement of exchange rates. Moreover, it is also imperative to have a basic understanding of how the fluctuations and the factors determining the same affect the trading relationship of a country with other countries. The exchange rates tend to fluctuate on a daily basis along with the changing market forces of demand and supply of the currencies from one country to the other. For these reasons, while sending or receiving money internationally, it is vital to understand the factors that determine the exchange rates. Here are some of them:
- Inflation Rates: The changes in the market inflations might cause changes in the exchange rate. A country that has a lower rate of inflation that others will observe an appreciation in the overall value of its currency. The prices of various goods and services tend to increase at a slower rate wherein the inflation is low. A country that has a consistent lower inflation rate tends to exhibit a higher value of the currency. Similarly, a country with higher inflation rates would observe a depreciation in the currency value and thus experiences higher interest rates.
- Interest Rates: The fluctuations in the interest rates might affect the currency value as well as the dollar exchange rate. The interest rates, forex rates, along with the inflation rates -all of these are correlated. The increase in the interest rate would cause the currency of a country to appreciate. This is because the higher interest rates offer higher rates to the lenders. Thus, it tends to attract more foreign funds & capital. This results into a rise in the exchange rates.
- Current Account of the Country/Balance of Payments: The current account of a particular country reflects the balance of earnings and trades upon foreign investment. It comprises the total number of transactions which would include the exports, debts, imports, and so more. A deficit in the current account of the country due to the excessive spending of its currency than its earnings on exporting goods & services causes depreciation. As a result, the balance of payments alters the exchange rate for the domestic currency.
- Government Debt: This is a form of national or public debt that is owned by the central government. A country that has government debt has less chances of acquiring the foreign capital. This would lead to inflation. The foreign investors would sell their bonds in the open market if the government of a particular predicts any sort of national debt. Because of this, a decrease in the overall value of the exchange rate would take place.
- Terms of Trade: The terms of trade is related to the balance of payments and current accounts of a country. This is the ratio of total export prices to the import prices. The terms of trade of a particular country tends to improve if the export price rises at a rate greater than the import prices. As a result of this, higher revenue is generated. This causes a higher demand for the currency of the particular country and as a result, an increase in the current value of the currency of the country. Due to this, there is an appreciation in the exchange rate. So, it is vital that you are aware of the rates before you remit money from a country. Several online platforms are available to provide the best rates for money transfer in a country. For example, Instarem is a widely used remittance company in Australia.
- Recession: When a particular country is experiencing recession, then its interest rates might fall. This decreases the chances of acquiring any form of foreign capital. As a result of this, the currency of the country weakens when compared to that of other countries. Therefore, this tends to lower the exchange rate.
All of these factors determine the regular fluctuations in the global as well as national exchange rates. If you are transferring money internationally, then you must be aware of these factors for better evaluation of the best time for making the transfer.