Currency Exchange Rates | ForexGen

No particular individual or organisation determines foreign exchange rates. Forces of supply and demand for currencies determine these rates. The variance in supply and demand is in turn caused by several other factors such as interest rates, global trade, inflation, and political influence. Below are a few of these and how they affect exchange rates. INTEREST RATES If interest rates are higher in, say, the US than other countries, investors will choose to invest in the US money market because of higher returns This increases demand for the dollar. If interest rates are lower in the US than in other countries the reverse becomes true.

GLOBAL TRADE: Strong economies import fewer goods than they export. This is known as trade balance. If world prices for what a country exports rise in comparison with the cost of that country’s imports, that country will be earning more for its exports than it pays for its imports. The greater the demand for a country’s exports the more demand there will be for that country’s currency.

INFLATION: If a country’s inflation rate is high, investors are less likely to invest there, even with higher interest rates.The expectation is that the value of that currency (hence investment) will be eroded by inflation. A lower inflation rate attracts investors hence drives up demand for that country’s currency because there will be no expectation that the value of the investment will be eroded by inflation.

POLITICAL STABILITY: Political governance is a major factor in how a country’s economy performs. Bad politics drives away investment. Government must implement effective monetary policies to control inflation and interests rates. Excessive Government spending drives inflation therefore reduces the demand for a particular currency.

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