Factors Influencing Foreign Exchange Rates

FINANCE 1
Finance
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FINANCE 2
Introduction
Foreign Exchange rate is considered to be among the most vital means in which the
economic status of the country can be determined. The term Exchange rate refers to the rate
through which the country’s currency can be changed in relation to another (Twin, 2019).
However, exchange rate fluctuates daily due to differences invisible forces of demand and
supply about the currencies of one country to another.
Economic factors that influence the Foreign Exchange Rates
Inflation rates; the change in inflation leads to change in rate of exchanging the currency.
It is believed that a country with low rate of inflation than other countries gains the value of their
currencies (Albertijn et al, 2011) This is because the prices of the products in the country rises
at a slower rate where there is low inflation.
Interest rates; the change in interest rate of the country influences the value of currency
and the rate of Euro exchange. It is evident that the rate of foreign exchange, interest rates and
inflation are linearly correlated. Besides, when interest rates increase, the country’s currency
gains since lenders prefer higher rates. Thus, leading to increased foreign capital that rises the
exchange rate
Balance of payments; the Balance of payments reflects the earnings about foreign
investments. This costs of the level of transactions in form of exports, debt and imports. Most
important is that, B.O.P changes rate of exchange of the county’s local currency. In addition,
‘public debt’ also affects foreign exchange rate of the country’s currency. The country with high
rates of debts acquire low foreign capital thus predicting low rates of foreign exchange (Albertijn
et al, 2011). More so, terms of trade affect foreign rate of exchange of the economy. The
country’s ‘terms of trade’ affects positively when the exports price increases more than the price
of imports. In addition, economic performance and stability of political climate affects the foreign
exchange rates of economies’ currencies (Suresh, 2013). The country which possess the
booming financial and trade policies increases its value of the currency. Moreover, speculations
also affect the country’s foreign exchange rate. When the country’s currency is anticipated to
rise, most investors are likely to demand more currency for the purpose of making profits in the
sooner future. In this case, the currency’s value can rise due to the shift of demand outwards.