What are the factors that affect the currency exchange rate?

Money exchange or currency exchange is the exchange of a currency into the subsequent value of a different currency. A lot of financial services organizations provide these services. Currency exchange is a business which has the legal right to exchange one currency for another as a service for their customers, for instance, if an individual wants to convert Australian dollar to Indian rupee, they can visit these institutions for these services. The currency exchange profits from the services either through adjusting the exchange rate or taking a commission.

A currency exchange rate has two components, base currency and a counter currency. The base currency is the foreign currency, while our country’s currency is the counter currency. Money exchange is the exchange of a country’s currency for another. Exchange rate is the amount of one currency that an individual requires for buying to sell one unit of other currencies. Exchange rate between the currencies either go up and down all the time and it costs an individual a lot of money.

The factors that affect the currency exchange rate are listed below:

  1. Inflation rate:

The currency exchange rates are affected a lot by the inflation. The country that has the low inflation rate while compared to others will have an increase in the value of their currency. Cost of goods and services increase slowly if inflation is low.

  1. Political stability:

The political state of a country also has an impact on the exchange rate, if an individual is going to convert aud to inr while there is some political turbulence in either of the countries, the exchange rates may be affected in some way or the other.

  1. Recession:

A country going through recession will also have a major impact on the exchange rate. if a country experiences recession, the interest rate falls and decreasing the foreign investment and lowering the exchange rate.

  1. Trade terms:

The ratio of export price when compared to import is known as terms of trade. If the export’s price is greater compared to import’s price, then a country’s term of trade improves. This affects an appreciation of exchange rate.

  1. Interest rates:

Any change in the interest rate will directly affect the currency value. A lot of factors like exchange rate, foreign exchange and inflation are inter related. The increase in interest rates cause an appreciation I the country’s currency which increases the exchange rates. For instance, if an individual is planning to convert aud to inr, they should keep a check on the interest rates before doing so.

  1. Government debt:

A government debt is a type of public debt that is owned by the central government. A country with high government debt attracts the foreign capital hence leading it to inflation. It will result in a decrease in exchange rate. For example, if an individual is planning to convert aud to inr, from a government that is in debt, it will then result in a decrease in the exchange rate.

Comments are closed