Besides the level of inflation and interest rates, the exchange rate is often used to measure the level of a country's economy. Currency exchange rate plays an important role in trade between countries, where most of the countries in the world today are involved in the activity of the free market economy. For investment companies and foreign investors, the exchange rate will have an impact on returns and investment portfolio.
Currency exchange rate of a country is relative, and is expressed in comparison with the currencies of other countries. Of course, the currency exchange rate changes will affect the activity of trade between the two countries. A stronger exchange rate would cause the value of the country's exports more expensive and imports cheaper from other countries, and vice versa. Here are 6 factors that could affect the currency exchange rate movements between the two countries:
1. The difference in inflation rates between the two countries
A country that consistently low inflation rates will be stronger currency exchange rates compared to state that higher inflation. Purchasing power (purchasing power) of the currency is relatively larger than the other countries. At the end of the 20th century, countries with a low inflation rate are Japan, Germany and Switzerland, while the United States and Canada followed. Currency exchange rate countries that higher inflation will depreciate compared to its trading partner countries.
2. The difference in interest rates between the two countries
Interest rates, inflation and exchange rate very closely linked. By changing the interest rate, the central bank of a country can affect inflation and currency exchange rates. Higher interest rates will lead to demand for the country's currency to rise. Domestic and foreign investors will be attracted by a larger return. However, if inflation higher returns, investors will be out until the central bank raise interest rates again. Conversely, if the central bank lowers interest rates will tend to weaken the exchange rate of the country.
3. The trade balance
The trade balance between the two countries contain all payments from the sale of goods and services. The trade balance of a country called the deficit if the country pays more to its trading partner countries compared with payments derived from the trading partner countries. In this case the country needs more currency trading partner countries, which led to the exchange rate of the country's currency weakened against the partner countries. The opposite situation is called a surplus, which the exchange rate of the country's currency strengthened against the trading partner countries.
4. Public debt (public debt)
Domestic budget balance of a country is also used to finance projects for the benefit of the public and government. If the budget deficit, the public debt to swell. High public debt which will lead to rising inflation. The budget deficit could be covered by selling government bonds or printing money. Things could deteriorate if large debt lead the country defaults (failure to pay) so that its debt ratings fall. High public debt will obviously tend to weaken the exchange rate of the country.
5. Ratio of export prices and import prices
If export prices are rising faster than import prices, the exchange rate of the country's currency tends to strengthen. Demand for goods and services from these countries go up, which means increased demand for its currency. The opposite situation for import prices rising faster than export prices.
6. Political stability and economic
Investors would be looking for countries with good economic performance and a stable political conditions. The country unstable political conditions will tend to be at high risk as a place to invest. The political situation will have an impact on economic performance and investor confidence, which in turn will affect the exchange rate of the country.
Currency exchange rate of a country is relative, and is expressed in comparison with the currencies of other countries. Of course, the currency exchange rate changes will affect the activity of trade between the two countries. A stronger exchange rate would cause the value of the country's exports more expensive and imports cheaper from other countries, and vice versa. Here are 6 factors that could affect the currency exchange rate movements between the two countries:
1. The difference in inflation rates between the two countries
A country that consistently low inflation rates will be stronger currency exchange rates compared to state that higher inflation. Purchasing power (purchasing power) of the currency is relatively larger than the other countries. At the end of the 20th century, countries with a low inflation rate are Japan, Germany and Switzerland, while the United States and Canada followed. Currency exchange rate countries that higher inflation will depreciate compared to its trading partner countries.
2. The difference in interest rates between the two countries
Interest rates, inflation and exchange rate very closely linked. By changing the interest rate, the central bank of a country can affect inflation and currency exchange rates. Higher interest rates will lead to demand for the country's currency to rise. Domestic and foreign investors will be attracted by a larger return. However, if inflation higher returns, investors will be out until the central bank raise interest rates again. Conversely, if the central bank lowers interest rates will tend to weaken the exchange rate of the country.
3. The trade balance
The trade balance between the two countries contain all payments from the sale of goods and services. The trade balance of a country called the deficit if the country pays more to its trading partner countries compared with payments derived from the trading partner countries. In this case the country needs more currency trading partner countries, which led to the exchange rate of the country's currency weakened against the partner countries. The opposite situation is called a surplus, which the exchange rate of the country's currency strengthened against the trading partner countries.
4. Public debt (public debt)
Domestic budget balance of a country is also used to finance projects for the benefit of the public and government. If the budget deficit, the public debt to swell. High public debt which will lead to rising inflation. The budget deficit could be covered by selling government bonds or printing money. Things could deteriorate if large debt lead the country defaults (failure to pay) so that its debt ratings fall. High public debt will obviously tend to weaken the exchange rate of the country.
5. Ratio of export prices and import prices
If export prices are rising faster than import prices, the exchange rate of the country's currency tends to strengthen. Demand for goods and services from these countries go up, which means increased demand for its currency. The opposite situation for import prices rising faster than export prices.
6. Political stability and economic
Investors would be looking for countries with good economic performance and a stable political conditions. The country unstable political conditions will tend to be at high risk as a place to invest. The political situation will have an impact on economic performance and investor confidence, which in turn will affect the exchange rate of the country.
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