Foreign exchange rates are an indicator of a country’s economic health, and of the suitability of an economy for business expansion. This is why many people and organizations closely watch forex markets.
You may have heard the word ‘volatile’ in the foreign exchange space, but what does it mean? What influences fluctuations in exchange rates?
Exchange rate volatility refers to a currency rising or falling in value, finally affecting the profitability of a trade (or transfer) overseas.
So, what influences volatility?
Inflation rates affect a country’s currency. A low inflation rate usually displays an increasing currency value, since purchasing power rises compared to other currencies. On the other hand, higher inflation typically produces reduced value of the currency compared to other currencies as well as higher interest rates.
Government debt also affects inflation rates. A country that has a great deal of government debt is not likely to obtain foreign capital and this can lead to inflation.
Inflation rates, interest rates and exchange rates are all interconnected. Rising interest rates cause a country’s currency to increase in value, since lenders are provided with higher rates, attracting more foreign capital. This can lead to an increase in the value of the currency and hence, the exchange rate. But lower interest rates can cause the currency to depreciate.
If a country shows strong economic performance and sound monetary policy, investors trust and seek out those countries. This causes an increase in the demand and value of that country’s currency.
An economic recession, on the other hand, can cause a reduction in the exchange rate because interest rates are likely to fall.
Another factor that can reduce the value of a currency is the determent of foreign investment. But if the recession causes inflation to fall, the country may become more globally competitive and demand for the currency may rise again.
Tourists traveling to a country with a weaker currency than their own will get more from a money transfer to that country when their home currency appreciates against the foreign currency. Similarly, reduction in value of a currency means that foreign tourists are more likely to visit that country and spend more on their visit.
In addition to economic performance, the political state of a country also affects the strength of the currency. A country with a higher risk for political turmoil will be unattractive to foreign investors, causing a depreciation of its domestic currency.
If you are looking for currency exchange without any hassle in Frisco or Arlington, Texas, call Texas Currency Exchange at 888-975-6009. At Texas Currency exchange, we will help you with any questions about exchange rates, the type of currency you will need for your travels and more.