Reasons Why Foreign Exchange Rates Fluctuate

Foreign exchange rates can be used to determine a country’s economic stability. It is, therefore, important for it to be monitored closely. The foreign exchange rate is the rate at which a country’s currency is converted into another currency. If one sends or receives money from abroad on a regular, they need to be aware of how the rates keep fluctuating. Here are some of the reasons as to why the prices keep changing

Inflation Rates

Changes in the market inflation will lead to variations in the exchange rates. A country that has low inflation as compared to their counterpart that they are trading currencies with will see an appreciation of the value of their currency. Prices of goods and services will rise slowly in a country with a lower inflation rate. That also leads to a rise in the value of the currency. A high inflation rate will weaken the currency and subsequently increase interest rates.

Interest Rates

An increase in interest rates will enhance the value of the country’s currency. This is because higher interest rates will increase the rates to lenders and that will attract more foreign capital. When that happens, there will be an increase in exchange rates.

Government Debt

Government debt is a debt that is owned by the central government. It is also referred to as national debt. A country with a high debt will have a hard time acquiring foreign currency. Therefore, it will lead to inflation. When the market predicts government debt within a country, foreign investors will sell bonds in the open market. In such an event, the value of the exchange rate will decrease.

Political Stability

A country’s political stability determines the strength of its currency. A country that has a strong political ground will attract foreign investors. This will, in turn, increase the value of the currency. The currency will have a high value because there will be no room for uncertainties. Political confusions, on the other hand, will lead to decrease in the value of the currency.

Recession

When a country experiences recession, what follows after is the decrease in interest rates. That will, in turn, reduce the chances of acquiring foreign capital. The currency, therefore, reduces in value as compared to the other countries and that reduces the exchange rates.

Speculation

When it is speculated that the currency will rise, investors will demand more so as to make the profit. The monetary value will in turn increase, therefore, increasing the exchange rates.