Why Exchange Rates Work And What Influences Them
November 24, 2009 by Robert Sharp
Filed under Forex Broker
Most of us would not claim to have an in depth knowledge of the stock markets and how currency exchange rates work, but most of us are aware of the existence of currency exchange rates and that their value changes regularly. Many of us don’t take too much notice of exchange rates unless we are planning a vacation overseas, but they do affect our lives on a daily basis.
What currency exchange rates actually are is a comparison of the value of one particular currency with another world currency. They are usually expressed as as ratio and look like – 1 US Dollar = 105 Japanese Yen. These currency exchange rates vary every day and you will often see the financial journalists talking about the dollar rising and falling. Sometimes in the case of recession or economic crisis the exchange rates can decline sharply.
Supply and demand of the currency is one of the key factors determining the exchange rate. Demand for the currency comes when lots of investors want to invest using that currency. This can be prompted by higher interest rates in a country, which will give investors a better return on their money. Supply of currency can affect the exchange rate in tandem with demand. If there is a lot of people wanting to purchase and not so much currency available the value will be high. On the other hand, if the federal mint prints lots of extra money and releases it into the market place then supply will be higher and demand for the currency can drop, which will make exchange rates drop.
The inflation rate in a particular country is also an important factor in determining currency exchange rates. The higher the inflation rate, the less the currency is likely to be valued at since inflation devalues the currency over time.
The trade balance is also an important factor in how currency exchange rates work. When the world prices paid for products that a country exports are higher than what the country is paying for imports, then the country makes more money, is more profitable and the value of its currency is stronger. If the trade balance is in good shape in the economy, then foreign investors will find investing in that country’s assets more attractive. When the trade balance is out then the currency exchange rates are likely to drop in comparison with other currencies.
People are affected by currency exchange rates regularly, as they determine the price that people pay for imported goods in a country. They also determine how popular your country’s exported goods are to other countries.
When the cost of exporting goods rises due to the currency exchange rates, then businesses can be forced to cut costs and this can lead to job losses. This is another way that currency exchange rates can affect regular people and their lives.
Currency exchange rates are affected by a number of economic forces that dictate the value of the currency. Reserve banks try to modify inflation and interest rates in order to keep the currency at the ideal balance for a country’s trading requirements.
Numerous circumstances rule currency exchange rates. Find out about an exchange rate calculator and the many variables that help dictate the value of currency.
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