Forex is a term that refers to foreign exchange rate which is the rate at which a particular country’s currency can be changed to another. It is a crucial means through which the relative level of economic health of a nation is determined. Knowing a country’s foreign exchange rate is a way to know how stable its economy is. This is the reason why the exchange rate is watched and analyzed every other time. An individual who is interested in sending or receiving money from overseas should be aware of the currency exchange rates which fluctuate daily due to the market forces of supply and demand of currencies. Below are some factors that determine exchange rates.
Factors affecting exchange rates
Inflation rates
Any change in market inflation impacts the currency exchange rates by changing it. In an instance where a country has an inflation rate which is lower than that of another state, the former country will notice an appreciation in the value of its currency. Where the inflation is low, the amount of money paid for goods and services increases at a slower rate. A country that has a higher inflation rate experiences a depreciation in its currency and goes hand in hand with higher interest rates, while that which exhibits a consistently lower inflation rate has a rising currency value.
Interest rates
Changes experienced in interest rates impact the value of currency and the dollar exchange rate. There is a correlation between interest rates, forex rates, and inflation. An increase in the interest rates of a country results in the appreciation of the country’s currency. This is due to the higher interest rates providing higher rates to lenders. These rates to the lenders attract more foreign capital and therefore cause an increase in exchange rates.
The country’s balance of payments
This balance of payments refers to the country’s current account, which is a reflection of the balance of trade and the earnings on foreign investment. It is comprised of the entire number of transactions which are inclusive of its imports, exports, debt among others. A deficit in the current account because of spending majority of its currency on importing products than it is earning through exports leads to depreciation. The balance of payments causes the fluctuation of the exchange rate of its domestic currency.
The government’s debt
This can also be used concerning public debt or national debt, which is owned by the central government. In a case where the country has a government debt, this state is less likely to acquire foreign capital. This, therefore, leads to inflation.