There are multiple factors that affect exchange rates, with much of them being connected to the trading relations that exist between countries. Exchange rates are essentially a way to compare the currency of two countries. If you are getting involved in the stock exchange, it is vital for you to have some understanding of the factors that affect exchange rates so you will understand why the stocks or other commodities are priced the way they are when you buy them.
Stock Exchange News
The stock exchange itself has a huge influence on exchange rates of a country. For instance, if there is a big company in a certain country and it suddenly decides to outsource or open up a branch in a different country, then the news about that happening is very likely to affect both country’s exchange rates. As investors decide whether or not to invest in the company, this helps to influence and determine the exchange rates, as well as the interest rates in those countries.
Commodities in Demand
Another factor that can affect exchange rates is if a country has a lot of in demand commodities like oil or precious metals, etc. If the country’s economy is growing, then likely their exchange rates will be affected since their economy is getting better. If a country, on the other hand, needs to buy its commodities from a different country, their exchange rates will be less favorable.
Domestic economic policy in a country also has a great impact on the exchange rates. For instance, if a government puts various monetary policies into effect that helps lower their debt, it will show up in the way their exchange rate goes up or down.
Countries that have a low inflation rate normally have currencies that are worth more and that makes their exchange rates more favorable. If the country as a high inflation rate, then their currency will depreciate and be worth less than their trading partners’ currency in other countries.
Interest rates in a country are another factor that can effect exchange rates of their currencies. This is seen in cases such as when central banks use their influence to use interest rates to affect both inflation in a country, as well as exchange rates. For example, if a country has a high interest rate, then their currency may have a higher value than other countries, which attracts foreign investment and helps to raise the exchange rate of their currency. If the opposite happens, then the country’s exchange rate would fall.
Public Debt of a Country
If a country has a large amount of public debt then that country is not attractive for foreign investment to occur. This is due to the fact that this type of situation can cause high inflation, which means it gets paid back with money that is worth less in the future. This happens when a country prints more money to pay off their debt and thus it ends up lowering the price of what foreign investors would pay for things like domestic bonds, plus the other countries may fear the country in debt is going to renege on their obligation to pay the debt back. All of this causes the exchange rates to be unfavorable to the country in debt.
A country’s trade balance is equal to the full value of their exports minus the import values. If the results are positive, then the country has an advantageous trade balance, but if it is negative, there is what is called a trade deficit. A country’s trade balance affects whether or not their currency is in demand. A surplus brings more demand, while a deficit causes less demand. Thus depending on the circumstance, the country’s exchange rate can go up or down accordingly.
Political Steadiness and Financial Performance
Another big factor in exchange rates is the political steadiness and financial performance of a country.Foreign investors only want to invest in a country that is stable both politically and financially so they won’t lose their money. So, if a country is in good shape, it attracts investors, which would raise their exchange rate of currency, while if the country is in some sort of political or financial unrest, no one would want to invest in it and its exchange rates would be poor.
The employment level in a country also affects the exchange rates of their currency. If there is a high amount of unemployment in a country, it leads to less spending and a fear of the future. This causes potential investors to have less of a reason to want to invest in that country since they could lose their funds. This will ultimately cause that country’s exchange rates to depreciate.
The bottom line is that multiple factors play a role in determining the currency exchange rates in a country and these resulting rates can change very rapidly depending on the country’s current situation.