How Currency Exchange Rates Are Influenced   by Jeremy Winters

in Finance    (submitted 2011-11-16)

A nation's economic health can be determined not only through its inflation and rates of interest, but also through its currency exchange rates which is what determines its strength in the global foreign exchange market. Currency exchange rates are probably one of the most evaluated and observed factors in the financial world since a nation's degree of global trade is dependent upon the exchange rate of the nation. However, it's not only global trade, but also people who are trading in the stock market who get affected by continuous movements in the exchange rates.

In cases of international trade, a country having a stronger or higher currency finds its imports cheap and exports expensive, thus reaping profits for the country. A lower currency would be the opposite with costly imports and cheap exports.

The actual issues that decide exchange rates are many and one of them is the bilateral relationship relating to two trading nations. A nation with reduced inflation rates most likely has a higher currency as the buying power of the currency in relation to the other currencies will increase. The reasons why countries such as Germany, Japan, Switzerland, the US, the UK, and Canada dominated the second half of the 20th century is due to the low inflation rates they observed in their economic systems. Nations having depreciated exchange rate values have always paid a higher price in the course of international trades.

Exchange rates are highly linked to interest and inflation rates. A nation's unstable rates of interest always have an influence on its currency and inflation values. Central banks of various countries attempt to manipulate rates of interest in order to achieve and maintain a favorable inflation and exchange rate.

National governments typically participate in borrowing money from their own people for a number of public sector projects and financing for other government expenses. This kind of massive funding does improve a country's domestic economy, nonetheless it largely keeps away foreign individual and institutional investors. The reason is that nations with more substantial internal debt typically see a rise in inflation rates. And in the event the government begins printing money to repay its debts, it would cause higher circulation of money, thus causing inflation to rise even further.

In cases where a nation cannot raise money with internal financing, it would most likely indulge in increasing its security supply to foreign parties at a less expensive rate. People from other countries who are informed of the country's internal financial debt will mostly be wary and wouldn't like the securities to be denominated in the security supplying country's currency. Debt rating given by credit rating companies is essential in determining the country's economic health, which is in addition an important determinant of currency exchange rates.

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