How Exchange Rates Work And What Affects Them

How Exchange Rates Work

Negosentro.comExchange rates work by calculating the actual value of foreign currency. In other words, the exchange rates are what the foreign currency is worth. These rates are determined by a group of foreign exchange traders who work around the clock trading the currencies. In 2016, it was reported that $5.1 trillion of foreign currencies were traded on the Forex.

Prices Constantly Changing

The prices of some foreign currencies, such as the Canadian dollar, European euros, and Mexican pesos, are constantly changing. Europe, Canada, Mexico, Britain and Japan all utilize flexible exchange rates. As far as the central bank and government go, they do not actively get involved in the foreign trade process just to keep the exchange rate fixed. However, some countries are not permitted to regulate the exchange rates but they can influence them.

Traveling Abroad

Travelers going abroad need to plan for exchange rate values in advance. It is possible to make money with Forex in many ways. One way is to utilize the BYFX Global’s FOREX Referal Program. Another way is to invest in the Forex market. The profit you earn can be applied to your vacation budget.

There are benefits to traveling abroad, especially when the U.S. dollar is strong. As long as the U.S. dollar is strong, travelers can buy more foreign currency. The end result is a more affordable vacation. Your personal finances can be impacted by exchange rates since they vary from one day to another. This is especially true if you plan for your exchange rate values too far in advance. The total cost of your international vacation may be lower or higher depending on the current exchange rates.

Inflation Rates

Exchange rates change along with market inflation. Countries with lower inflation rates will see the value of their currency appreciate. When inflation is low, the prices of services and goods will increase but only gradually. Countries with higher inflation will see depreciation in their currency. And, countries with lower inflation will experience the exact opposite.

A Country’s Current Balance/Account Of Payments

The balance of earnings and trade on foreign investment is impacted by a country’s current account. A country’s account includes the total number of transactions. These transactions include imports, debt and exports. Depreciation occurs when a country sees a deficit in its current account. Regardless, of what causes the deficit, it will cause depreciation. 

Interest Rates

Fluctuations in the interest rates also impact the exchange rates and currency value. Inflation, interest rates and Forex rates have a mutual connection. This basically means that if inflation or Forex rates change, the interest rates will change as well. When a country’s interest rates increase its currency will appreciate.

Summary

Other factors that impact exchange rates include government debt, terms of trade, political stability and recession. Foreign investors find countries with lower political turmoil risks more attractive. This alone will encourage investors to pour more investments into countries with economic and political stability. Countries in recession see their interest rates fall, which in turn will decrease their odds of acquiring foreign capital.