Exchange rates are very important for those who are involved in international trade. However, this does not mean that if you are someone who has a local or national scale business, then you are free from the impact of exchange rates. For those who are unaware, dollar is the strongest currency in the world. It belongs to the United States of America and is the leader inn terms of world economy for a number of reasons. This is why your currency is always compared to the value of the dollar. Read ahead now to find top factors that influence exchange rates.
- Differentials in inflation: Inflation has a great impact on the exchange rate of the world this is because the rate of inflation is definitely not the same all over the globe. There are certain countries where this is high and certain nations this is low. Well, the countries which have shown consistency in having low inflation are the ones that have a rising currency value. The reason behind this is the relative increase in its purchasing power. This is what helps it to become a leader when compared to the other nations of the world.
- Differentials in interest rates: now, you must understand that none of these determinants are watertight compartments. They are all linked to one another and that is why one factor has an impact on the other, thus changing the overall picture at the end. When the interest rates are decided to be high by the central banks of the nation, there is a direct influence of the exchange rates as well as inflation of the nation. the logic behind this is that high interest rates lead to high attraction of foreign exchange and that is how the exchange rate also increases.
- Current account deficits: what is current account? well, to keep the explanation very easy to understand and simple to grasp, current account refers to the balance of trade that exists between a nation and its trading partners. It shows all the payments that have been done between nations for goods and other services. When there is a deficit, it implies that there is more expenditure that it is being earned. Thus, it speaks of a loss in the accounts. When a situation arises, the exchange rate for your country goes really low.
- Public debt: Last but definitely not the least, public debt refers to the deficit that is faced on a very large scale whenever there is a need for the payment for public sector projects and funding for the government. A large debt leads to inflation which then lowers the exchange rate. As stated earlier, all the factors are linked and this is why mishandling of even one aspect can ruin all the hardwork does in the other factors. In case the situation worsens a lot, the government needs to print more money. This increased supply also leads to inflation and by now, you must have understood the result.