Recent Posts

Several elements shape the way exchange rates move. This is one of the main factors impacting a nation’s overall economic condition. Let us discuss some elements affecting the exchange rates.

Current Account Deficits

The current account is the aggregate of foreign net income, balance of trade, and net current transfers. An upbeat current account balance indicates a country lends money to its fellow countries. But a negative current account balance means it borrows money from its neighboring countries. Let’s put it this way: surplus bolsters net foreign assets, while a deficit reduces it.

Debt

Governments resort to large financing to fund government programs and public sector projects. Sure it can stimulate the domestic economy, but huge deficits and debts to not entice global investors to venture in a country.

A huge debt has several repercussions. One is high inflation. A government may manufacture more money to pay off a huge chunk of debt. But it can also lead to inflation. Also, the government must amplify the volume of securities being sold to foreign investors should it fail to fulfill its deficit. And for foreigners, a nation is at risk of defaulting its obligations.

Differentials in Inflation

During the other half of the 20th century, Germany and Japan, among other countries, sustained low inflation. Canada and the United States attained low inflation in the latter part of the century. If a nation is experiencing consistent low inflation, the value of its currency surges. Conversely, if a nation is enduring constantly high inflation, the value of its currency declines (relative to its counterparts) and higher interest rates.

Differentials in Interest Rates

Central banks have the discretion whether to raise or slash rates, depending on the overall economic condition. Higher rates render a higher return to lenders, resulting in rising exchange rate and better foreign capital. On the other hand, if inflation is much greater than other nations, the effect of higher rates is eased.

Economic Performance / Political Stability

Investors find a particular nation appealing if it exhibits firm economic performance. Possessing such positive traits implies less economic and political perils, making investors put their capital in into that country. For instance, a political upheaval can dent a currency’s value and the economy in the long run.

Terms of Trade

It refers to the value of exports relative to prices. If exports are higher than imports, demand for exports and a country’s currency increases. But if the exports’ price soars by a minimal rate than imports, the currency’s value will slump.

It is imperative for investors to study the aforementioned elements, including inflation and trade terms, influencing the exchange rates, which impacts an investment’s rate of return.