What are the key factors that affect currency exchange rates?

  • ERemit
  • 17 February, 2021
  • 2 minutes read

Currency exchange rates are one of the major factors that affect the economic health of a country, thus, are analysed in close precision in economic measures. Exchange rates can be defined as the value of one currency against another in cases of trade and transfer.

These exchange rates are very crucial when it comes to international money transfers. Anyone who wishes to send money online overseas needs to keep a keen eye on the exchange rate, which is volatile in its very nature. Why is it volatile? What are the factors causing the volatility? Here let us break them down:

  • Inflation Rates: Differences in market inflation cause variations in currency exchange rates. A country with a lower inflation rate will see an appreciation of its currency, thus its purchasing power increases. Countries with higher inflation normally face a depreciation in their currencies which is usually accompanied by higher interest rates.
  • Interest rates: Exchange rates, interest rates and inflation rates are all interconnected with one another. An increase in interest rates directly appreciates a country’s currency. How? Because moneylenders are presented with higher rates and thereby drawing more foreign capital. This can cause a surge in the value of a currency and exchange rate. Cutting interest rates have the reverse effect.
  • Import and Export Value: A country’s balance of payments (BOP) is the sum total of all the international trade and monetary transactions made by individuals, companies and government bodies altogether. These transactions include imports and exports of goods, services and capital. If a country’s exports are larger than its imports, it generates higher demand for the country’s exports, thereby booming the demand for the currency.
  • Political Stability: A country with less political turmoil attracts foreign investments and trades causing the surge in the value of the domestic currency. At the same time, if the country is bound to lots of political confusions and turbulence, no one wishes to invest there, thus their currency faces a depreciation in the global market.

All the above mentioned are the key factors that determine the foreign exchange rate fluctuations. If you send or receive money regularly, it’s rather essential that you stay up-to-date on these factors. It will help you better evaluate the optimal time for conducting international money transfer. Look out for the best online money transfer in Australia that gives a high exchange rate, thus granting you a better offer on the value of the money you send.