Foreign Exchange rate is one among the foremost important means through which a country’s relative level of economic health is decided. A country’s exchange rate provides a window to its economic stability, which is why it’s constantly watched and analyzed. If you’re thinking of sending or receiving money from overseas, you would like to stay a keen eye on the currency exchange rates.
The rate of exchange is defined as “the rate at which one country’s currency could also be converted into another.” it’s going to fluctuate daily with the changing economic process of supply and demand of currencies from one country to another. For these reasons; when sending or receiving money internationally, it’s important to know what determines exchange rates.
- Terms of Trade
Related to current accounts and balance of payments, the terms of trade is that the ratio of export prices to import prices. A country’s terms of trade improves if its exports prices rise at a greater rate than its imports prices. This leads to higher revenue, which causes a better demand for the country’s currency and a rise in its currency’s value. This results in an appreciation of exchange rate.
- Government Debt
Government debt is debt or debt owned by the central government. A country with government debt is a smaller amount likely to accumulate foreign capital, resulting in inflation. Foreign investors will sell their bonds within the open market if the market predicts government debt within a particular country. As a result, a decrease within the value of its rate of exchange will follow.
- Inflation Rates
Changes in market inflation cause changes in currency exchange rates. A country with a lower rate of inflation than another’s will see an appreciation within the value of its currency. The prices of products and services increase at a slower rate where the inflation is low. A country with a consistently lower rate of inflation exhibits a rising currency value while a rustic with higher inflation typically sees depreciation in its currency and is typically accompanied by higher interest rates
- Interest Rates
Changes in rate of interest affect currency value and dollar rate of exchange . Forex rates, interest rates, and inflation are all correlated. Increases in interest rates cause a country’s currency to understand because higher interest rates provide higher rates to lenders, thereby attracting more foreign capital, which causes an increase in exchange rates