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Key Factors that Affect Foreign Exchange Rates (Essay Sample)


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Key factors that affect foreign exchange rates
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On estimate, close to five trillion dollars of currency is exchanged daily in the global markets. The primary importance of exchange rates is the determinant of the economic health of a country. Thus, foreign exchange rates are the most scrutinized, watched and manipulated financial measures. Exchange rates refer to the value of one currency compared to another. Due to its volatile nature, various factors contribute to the constant changing of foreign exchange rates.
Inflation rate
Differentials in inflation rates affect the foreign exchange rates. Inflation is the pace at which the cost of goods and services rise over a period. When a country's inflation rate lowers, and the value in other countries rises, the worth of its currency increases. The prices of goods and services in that country increase as well. An increase in the inflation of a country when compared to others leads to a decrease in the purchasing power, and the inflation causes money to lose its value over time.
Interest rate
A change in interest rates in a country influences the foreign exchange rates. The interest rate is an amount of money charged for borrowing money from banks. When the interest is low, people borrow and spend a lot of money thereby increasing the value of the local currency. Interest rates fluctuation, on the other hand, attracts investors and foreign capital thus, leading to the rise of the country's exchange rate.
Present account deficit
The balance of doing business a country and its partners is a demonstration of the payment for commodities, services, interests, and dividends between nations. What determines the value of money is when a government can spend an equal amount on importing and exporting its products. However, if a government spends more importing than what they earn from the international market, it creates a deficit. Hence, the country relies on foreign currency to balance the scale, resulting in high demand

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