What does the course depend on?
The currency rate is one of the most important indicators of the country's economy. A clear understanding of the factors influencing the change in the exchange rate will help to better understand the economic situation in the country, as well as to apply knowledge on this issue in practice to improve one’s own financial well-being. What determines the exchange rate, and what factors have the most significant impact on it, we will try to understand further in our article.
Key factors affecting the exchange rate
Among the main factors that have a direct impact on the exchange rate, the following can be highlighted:
The trade balance is the ratio of import and export operations. Exports ensure the entry of foreign currency into the country, while imports result in an outflow of foreign funds from the state. If the trade balance is biased towards imports, this inevitably affects the national currency, the rate of which is falling. When the trade balance is shifted towards export, that is, the country exports more than it imports, the exchange rate of the national currency is strengthened.
The macroeconomic indicators include unemployment, inflation, gross domestic product, and others. Each country has its own economic policy and the calculation of certain indicators. Nevertheless, the main macroeconomic indicators in almost all countries remain unchanged. What in this case depends on the currency rate? For example, if the rates of inflation and unemployment are high, the rate of the national currency is inevitable decline. If the country shows an increase in production, the national currency is strengthened.
Central Bank Policy
This is one of the fundamental factors affecting the exchange rate. Here you can identify several areas, inextricably linked with the state of the national currency:
- Issuing money; when the money supply grows, the value of money decreases, and hence the national currency rate decreases;
- Currency interventions; the purchase and sale of foreign currency at the interbank foreign exchange market at a high or low rate helps to reduce or increase its value;
- Discount rate; the lower the percentage (discount rate) at which the Central Bank lends to commercial banks, the more stable is the rate of national currency;
- Debt transactions; in order to increase the exchange rate of the national currency, the Central Bank issues and sells its debt obligations - securities that guarantee fixed income, as well as the possibility of earning on the increase in their value. Thus, he withdraws the national currency from circulation, which leads to an increase in its value.
Large investment projects
The future rate of the state, directly or indirectly related to the outflow or inflow of foreign currency, has a certain impact on the currency rate.
Public confidence in the national currency
If the population prefers to keep funds in a foreign currency, then there is an increased demand for it, and this always negatively affects the exchange rate of the national currency.
It happens that large participants of the interbank or world currency market purposefully “loosen” the exchange rate to obtain speculative income.
Large-scale protest movements, terrorist attacks, mass strikes, serious natural disasters and military actions can be attributed to force majeure situations that have a direct impact on the currency rate.
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