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Why Forex Exchange Rates Affected?


A country's forex exchange rate provides a window to its economic stability, which is why it is constantly watched and analyzed. If you are thinking of sending or receiving money from overseas, you need to keep a keen eye on the currency exchange rates. – PowerPoint PPT presentation

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Title: Why Forex Exchange Rates Affected?

Forex Rates Today
Why Forex Exchange Rates Affected?
  • Inflation
  • Political Stability Performance
  • Countrys Current Account Deficits
  • Interest Rate
  • Government Debt
  • Recession

As a general rule, a country with a consistently
lower inflation rate exhibits a rising currency
value, as its purchasing power increases relative
to other currencies. The prices of goods and
services increase at a slower rate where the
inflation is low. Those countries with higher
inflation typically see depreciation in their
currency in relation to the currencies of their
trading partners. This is also usually
accompanied by higher interest rates.
Political Stability Performance
A country's political state and economic
performance can affect its currency strength. A
country with less risk for political turmoil is
more attractive to foreign investors, as a
result, drawing investment away from other
countries with more political and economic
stability. Increase in foreign capital, in turn,
leads to an appreciation in the value of its
domestic currency.
Countrys Current Account Deficits
A countrys current account reflects balance of
trade, earnings on foreign investment and its
trading partners, reflecting all payments between
countries for goods, services, interest and
dividends. The excess demand for foreign currency
lowers the country's forex exchange rate until
domestic goods and services are cheap enough for
foreigners, and foreign assets are too expensive
to generate sales for domestic interests.
Interest Rate
Changes in interest rate affect currency value
and dollar exchange rate. Forex rates, interest
rates, and inflation are all correlated. By
manipulating interest rates, central banks exert
influence over both inflation and exchange rates,
and changing interest rates impact inflation and
currency values.
Government Debt
Countries will engage in large-scale deficit
financing to pay for public sector projects and
governmental funding. While such activity
stimulates the domestic economy, nations with
large public deficits and debts are less
attractive to foreign investors. The reason? A
large debt encourages inflation, and if inflation
is high, the debt will be serviced and ultimately
paid off with cheaper real dollars in the future.
When a country experiences a recession, its
interest rates are likely to fall, decreasing its
chances to acquire foreign capital. As a result,
its currency weakens in comparison to that of
other countries, therefore lowering the exchange
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