Factors That Influence Exchange Rates

By our guest blogger Mehul.

Before talking about the factors that influence exchange rates and how a prepaid Forex card is your best option when it comes to exchange rates, let’s understand what Forex Exchange Rates is.

Foreign Exchange Rate, more commonly known as Forex Rate, is calculated to determine the economic condition of a country. Forex Rate of a country talks about its economic stability. That is why it is regularly analyzed.

In layman’s term, the exchange rate is the rate at which the currency of one country can be converted into the currency of another country.

Now let’s see what are the factors that influence exchange rates:

 

Supply and Demand –

Supply and demand is the biggest factor that influences exchange rates. When the supply of something is more than its demand, then its value decreases. On the other hand, if the demand for something is more than its supply, its value increases. It is easy to understand, but difficult to predict.

 

Inflation Rate –

Inflation is the rate at which the cost of goods and services rise over a period of time. In usual cases, a country with a high inflation rate tends to have a low exchange rate. The frequent change in the inflation rate of a country affects the value of its currency. When the inflation rate of a country is less, the cost of the good and services produced within the country rise at a slower rate. If we compare the inflation rates of two countries, the country with the lower inflation rate will have a better value of its currency. A country which exhibits low inflation rate on a consistent basis has a high currency value. In the past five years, India’s average inflation rate has been less than 5% compared to less than 2% of the US.

 

Interest Rates –

Like inflation rates, interest rates affect the value of the currency. Interest rates exhibit the earnings made by individuals or entities from the bank in the form of interest as well as the interest charged by the banks from the borrowers. If the interest rate provided by the bank to their account holders is increased, the local currency can become stronger.

 

National Debt –

National Debt is not a good thing for a country as it becomes less attractive to foreign investors. Also referred as Government Debt or Public Debt, National Debt is the money which is owned by the Central Government. If a country has National Debt, it may not be able to acquire any foreign capital, thereby inviting inflation.

 

Export and Import –

When a country buys more than what it sells, then its trade is in deficit. Likewise, when a country sells more than what it buys, then its trade is in surplus. The ratio of a country’s export prices and import prices influence the country’s exchange rate. This is known as Balance of Payments. If the country has a trade surplus, the value of its currency increases.

 

Political Condition –

A country’s political condition major influences its exchange rate. A country with high risk of a political change is not very attractive to foreign investors. A decrease in foreign capital leads to a depreciation in the value of the local currency. On the other hand, a nation with less risk of a political change attracts foreign investors more easily, thereby positively influencing its exchange rates.

 

Government Intervention –

At times, government intervention can influence the exchange rates. This is done by undervaluing the local currency so that the country’s exports become more competitive. The Government of India has done that in the past by purchasing US Dollars which resulted in the fall of the local currency. This resulted in having a trade surplus, ultimately leading to a better exchange rate.

 

Recession –

A recession is one of the biggest enemies of exchange rates. If a country goes into recession, its interest rates will most likely fall, which would result in the weakening of its currency. That would directly impact its exchange rate.

 

Speculation –

Speculation is basically predictions made by speculators. If speculators think that the value of the local currency will increase in the near future, the demand for it will start increasing. As the demand increases the value of the currency hikes up. However, it does not always have a positive impact on the market. There have been many instances when speculations made turned out to be incorrect, so it is never foolproof. The reason why the Pound Sterling fell so sharply last year soon after the Brexit in 2017 was because it was speculated that the United Kingdom would not be able to attract as much foreign capital.

 

Bottom Line –

Frequent changes in the exchange rate can be troublesome if you are studying in a foreign university, travel abroad often, frequently sending money to a foreign destination, etc. Keeping a tab on the market can give you an idea regarding the best time to exchange currencies.

Therefore, it is advisable to opt for a prepaid Forex Card when exchanging currencies. Buy Forex Online, for instance, provides a lock-in rate which allows you to lock the exchange rate and not let the market’s instability affect your rate. A prepaid Forex card purchased from Buy Forex Online also provides you with the best possible exchange rate in the market. In addition to that Buy Forex Online promises easy load and reload facility, two free ATM withdrawals, and an extremely quick service at negligible cost in the form of fee.

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