How Currency Exchange Rates Work and the Factors That Influences Them

Few of us could claim to be expert economists, but most of us have at least a basic understanding that currency exchange rates around the world affect each other and that the levels change regularly. There are many reasons that a nation’s currency exchange rates can strengthen or decline.

Rates reflect the relative value of a currency against another world currency. Rates are expressed as a ratio compared to another currency. For example – 1 US Dollar = 105 Yen. These rates fluctuate a little each day, and sometimes they can rise or fall dramatically depending on what it is happening in international traded and economics.

Supply and demand of the currency is one of the key factors determining the exchange amount. Demand for the currency comes when lots of investors want to invest using that currency. This can be prompted by higher interest rates in a country, which will give investors a better return on their money. Supply of currency can affect the exchange rate in tandem with demand. If there is a lot of people wanting to purchase and not so much currency available the value will be high. On the other hand, if the federal mint prints lots of extra money and releases it into the market place then supply will be higher and demand for the currency can drop, which will make exchange rates drop.

The inflation levels in a country can also affect currency exchange rates. If an inflation level is high, then the currency will be devalued as foreign investors will be less likely to invest in a currency that has a high level of inflation and will not give them a good return over time. The reserve bank monitors the level of inflation, but there are several external factors that influence the inflation level such as the cost of transporting goods and petrol, follow for more

It is essential that the nation’s treasury gets the trade balance right if a currency is to remain strong. When the prices paid globally for exported products are higher than what the same country is importing, then the economy will be in a good position and the currency will remain strong. Foreign investors will purchase more with that country’s currency and the economy will tick along. If the reverse is true, then this devalues the currency against others.

People are affected by exchange rates regularly, as they determine the price that people pay for imported goods in a country. They also determine how popular your country’s exported goods are to other countries.

When the trade balance is out and currency exchange rates are not right. Local businesses and producers may be forced to cut costs to remain internationally competitive. This can mean that people lose their jobs and economic stability is affected.

There are a number of economic forces that affect the way that currency exchange rates perform. Reserve banks in each country work to control the factors as much as possible that affect these rates and provide the best environment possible for a well functioning and effective economy. Next time you see the financial markets on the evening news, you will know more about what must be happening in the local economy to influence the currency rates.

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