What affects Currency Rates

Since they resemble other commodities in today’s society, when these rates rise or fall on the international market, they are responding the well-known impact of supply and demand. Also, where a country stands in that regard at any particular time may be seen in its foreign exchange rate. The following factors are standard indicators of current economic trends and their constant influence on the money supply:

● The so-called benchmark interest rates established by a country’s central banks affect the rates lending institutions charge their customers when they apply for any type of loan. For example, when the economy is underperforming, the banks may lower their interest rates, making it less expensive to borrow and spend. This often leads to an increase in consumer spending, and an expansion of the economy as well. By way of contrast, when the economy is overheated, the central banks raise their benchmark rates to help curb inflation and stabilize the economy.

● Entrepreneurs are particularly concerned about interest rates because they want to balance the return on their investment (ROI) with the safety of their funds. When interest rates rise, they earn more on the assets they have related to that currency as the rates rise. In addition, if lending institutions lower their interest rates, the opposite often occurs.

● A rise in unemployment is often a harbinger of an economic slowdown, which is followed by a reduction of the country’s currency rates because of a decrease in confidence and demand for the currency. If this trend continues and the currency supply increases, this can lead to further depreciation of the exchange rate.

● Experts agree that an economy has to expand as the population increases, but if this expansion happens too quickly, the buying power of the average will actually decrease as prices and salaries rise. Wit this in mind, most countries aim for an annual growth rate of 2%. As a rule, central banks raise their interest rates in times of rising inflation, and a change in those rates often precedes an adjustment to currency rates.

● Deflation, which is a sign that a country’s economy is stagnant, occurs during a recession. At that point central banks usually lower their interest rates to jumpstart the economy and reverse this negative trend.

● A country’s trade balance—the value of its exports when it exceeds the value of its imports and when it does not— has a significant effect on the supply and demand for its currency, and a trade deficit should always be avoided. When a trade surplus exists, the demand for that country’s currency increases, but a trade deficit increases the money supply, and if it is prolonged, it could result in serious devaluation of that currency.

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