We are going to analyze the six factors which influence the exchange rates. Right now we are writing this, and you’re reading this, no matter what time it is or year it is, the exchange rates are still changing. It changes the second you blink your eyes.

It is a state of fluctuation but has you ever wondered why these rates are changes? Or how it changes? 

#How it Works?

Just like the other things, the value of the currency depends on demand and supply.

Financial Guide

The prices of all the things, whether it is goods, exchanges rates and commodities are dependent on supply and demand.Supply and demand both are essential things for a country. A sudden change in both of the things can change the whole scenario.

For Example, Let’s Suppose, In India, the demand of mobile phone is constantly increasing. Many manufacturers from all around the world are selling there’s product in India. The products separate from the of people. Now, the demand of iPhone is high, and it is critical for Iphone manufacturers to meets its demand. Apple needs to deliver products according to their products demands if they fail there will be a lack of supply or vice versa.

If you want to read more about the demand and supply you can take a look at the article which is published by Forbes: Supply And Demand In Currency Markets

It is as simple as that if we explain it in a simple language than high demands causes high prices and high supply causes low prices or vice-versa.

Factors which influence the exchanges rates most are given as follows:

1. Government Intervention

Financial Guide

It is an action which is taken by government itself to interfere with decisions which are made by an Individual, organizations, groups and economic matters. Government Intervention directly affects the economy. It is a process which carried out by Government or Public Entity, and ultimately it will affect the market economy.

Government intervention helps keep the use of several economic strategies to compensate the imperfections of the financial system that provides a way to massive economic inequalities.  Everyone understand the law of demand, and it is essential for others to know that supply is not satisfactory to secure economic stability and government intervention. It should be applied to encourage a proper functioning of the country’s economy.  

 

2. Inflation

Financial Guide

Inflation does affect the exchange rates, having High or Low inflation, depends on the country, affects differently in each continent. Though, It is important to take control of inflation because high inflation demands high cost. So, keep it simple for the people to control the high-cost expenses. Therefore, High-Interest Rates attract the low currency value.

If we talk about the Foreign Exchange Rates or currency’s value, Inflation has a more negative impact other than having a positive influence on other countries. If a county has a low inflation rate, it does not assure an agreeable exchange rate for an economy of that particular country, but a remarkably high inflation rate is very expected to strike the country’s rates with other countries negatively.

 

3. Interest Rates

Financial Guide

High rates indicate the high return but only for investors. If a country has a high-interest rate, it normally becomes expensive for a middle-class family to take a loan and pay them back. On other hands, High-interest rates attract investors which ultimately increases the higher amount of returns for them.

A rise in interest rates in one country can offer investors a higher return, relative to other countries. This can make the country’s currency value rise as it becomes more attractive to investors.

No matter if we are talking about Inflation or the Interest Rates of an economy or the exchange rates on a country, all of them has highly correlated. Central Banks control the inflation and the exchange rates, and the changes in interest rates do impact the currency value and inflation of a particular country. If an economy has high-interest rates, it will attract the higher return comparing to the other countries.

 

4. Current Account Deficit

Financial Guide

Countries with large public debts are less attractive to foreign investors, due to fears of high inflation and the chances of defaulting. This will decrease the currency value. 

A current account deficit means a country is spending more on foreign trade than its earning. If the country is making up the deficit by borrowing capital from foreign sources, its currency will depreciate in value.

The extra demand for international currency diminishes the country’s exchange rate till GDP are inferior enough for immigrants, and international assets are too costly to generate exchanges for domestic interests.

 

5. Government Debt

Financial Guide

Economies will involve in large-scale debt funding to pay for state sector plans and governmental funding. Although such project excites the domestic market, countries with huge public deficits and liabilities are less engaging to foreign investors. The purpose? A massive debt promotes inflation, and if inflation has raised, the debt will maintained and eventually paid off with affordable real money in the future.

Countries with large public debts are less attractive to foreign investors, due to fears of high inflation and the chances of defaulting. This will decrease the currency value.

 

6. Speculation

Financial Guide

Most transaction in the foreign exchange market is speculative trades and these can have a direct impact on exchange rates.