Changes in market inflation lead to changes in exchange rates. A country whose inflation rate is lower than the others will see an appreciation of the value of its currency. Prices for goods and services increase more slowly when inflation is low. A country with a consistently low inflation rate shows a rising currency value while a country with higher inflation usually sees a depreciation of its currency and is usually accompanied by a rise in interest rates
2. Interest rate
Interest rate changes affect the value of the currency and the exchange rate of the dollar. Exchange rates, interest rates and inflation are all correlated. Increases in interest rates lead to a country’s currency appreciation, as higher interest rates provide higher rates to lenders, thus attracting more foreign capital, leading to higher interest rates. exchange.
3. Current account / balance of payments of the country
A country’s current account reflects the balance of trade and foreign investment income. It consists of the total number of transactions, including exports, imports, debt, etc. The current account deficit due to the fact that it spends more of its currency for importing goods than for export sales causes depreciation. The balance of payments fluctuates the exchange rate of its national currency.
4. Government debt
Public debt is the public debt or national debt held by the central government. A country with a public debt is less likely to acquire foreign capital, which leads to inflation. Foreign investors will sell their bonds on the open market if the market predicts a public debt in a given country. As a result, a decrease in the value of its exchange rate will follow.
5. Terms of exchange
In relation to current accounts and the balance of payments, the terms of trade are the ratio of export prices to import prices. A country’s terms of trade improve if its export prices rise faster than its import prices. This translates into higher incomes, which results in higher demand for the country’s currency and an increase in the value of its currency. This results in an appreciation of the exchange rate.
6. Political stability and performance
The political state and economic performance of a country can affect the strength of its currency. A country with less risk of political turmoil is more attractive to foreign investors, which keeps investment away from other countries with greater political and economic stability. The increase in foreign capital in turn leads to an appreciation of the value of its national currency. A country with a sound fiscal and trade policy leaves no room for uncertainty as to the value of its currency. But a country subject to political confusion may see a depreciation of exchange rates.
When a country goes through a recession, its interest rates are likely to go down, which will reduce its chances of acquiring foreign capital. As a result, its currency weakens relative to other countries, thus lowering the exchange rate.
If the value of a country’s currency is expected to increase, investors will ask for more in order to make a profit in the near future. As a result, the value of the currency will increase due to rising demand. This increase in the monetary value also results in a rise in the exchange rate.