Factors Affecting Currency Exchange Rates: Inflation Rates

Factors Affecting Currency Exchange Rates Students Name Institutional Affiliation The exchange rate plays a substantial role in determining the economic wealth of a country. The exchange rate of a given country needs to be checked regularly because it is a key determinant of the country's economic window. The exchange rate is the specific interest with which certain country's currency can be converted into another. In most cases, the standard exchange rate across the world is made on the basis of the US dollar. Hence, this rate keeps on changing daily depending on the market forces of both countries. In a situation whereby, a person wishes to send money overseas, it is important to understand the fluctuations in the exchange rate of the involved countries to avoid making huge losses that can be avoided by transacting at a later date. Therefore, the are various political, social and economic factors affecting the peso-dollar exchange rate. Inflation rates Inflation refers to a situation whereby the demand for goods is high hence causing the price of the goods to increase. Different countries have different inflation rates and, therefore, it is a key factor in the fluctuation of the exchange rate. Countries that experience low inflation rates have a higher appreciation in their currency as compared to countries that have high rates of inflation. Therefore, their money will have a high value. In countries with low inflation rates, the prices of goods and services increase at a low rate. Their currency is also characterized by low-interest rates. Therefore, in order to maintain the high values of currency, countries try their best to maintain low levels of inflation. Countries current accounts The current account of any country represents the recording of all its transactions in regard to imports and exports. It can also be termed as the balance of payment, and it has a huge impact on the exchange rate of the country’s currency. The current account can have a deficit in a situation whereby they have spent a lot of money on imports as compared to that spend on exports. On the other hand, a surplus is recorded in a case whereby the country has exported more goods as compared to the imports. This means that the country is carrying out a favorable trade. Given the fact that countries cannot grow their economy effectively without participating in international trade, then its current account will always have an impact on the country's exchange rate. A deficit on the balance of payments results to the depreciation of a country's currency while a surplus result to a depreciation. Hence, in the case of Philippine, its trade activities with the Us has had a lot of impact on its economy. The effects of the Philippine peso depreciation contribute to the decline of the country's economic status. Government debt Most of the developing countries have high levels of public debt, and this affects their daily exchange rates a lot. In the case whereby a country has huge public debt, it becomes difficult ...