The following factors have an impact on current exchange rates:
Inflation: If the rate of inflation in a country is lower than that in another country, demand for the former’s exports will rise. This, in turn, would create rising demand for that country’s currency, exerting upward pressure on its value.
Change in Competitiveness: Related to the inflation rate, this factor affects exchange rates considerably. Goods and servicesproduced by a country can become more competitive in the global market as a result of an increase in labor productivity. This increases the demand for these goods. A high volume of trade results in appreciation in the value of the country’s currency.
Higher Interest Rates: When the interest rates offered by banks or financial institutions of a particular country rise, depositing money in that country becomes a profitable investment option. This results in increased demand for the currency of that country.
Speculation: This is more of a sentimental factor than an economic one. Some people believe that the value of a country’s currency may rise in the near future. They buy the currency to earn profits, following appreciation in the exchange rates. Thisbuying activity results in increased demand for the currency.
Current Account Surplus: This factor is guided by the balance of trade of a country. When the value of the country’s exports exceeds the value of its imports, the inflow of foreign currency is higher than the outflow.
Value of Other Currencies: The strength or weakness of a currency can lead to a decline or rise in the value of another currency. For example, the weakening of the Euro led to the appreciation of the exchange rate of pound sterling between 1999 and 2001.
Current exchange rates are determined by the market forces of demand and supply. Most governments play a limited role in influencing exchange rates. Since the forex market is so vast, global exchange rates can not be impacted by an individual trader.
Find out more about Currency Rates.
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