The Factors Influencing Exchange Rates

Subject: Finance
Pages: 5
Words: 1238
Reading time:
4 min

Currency just like any other product has a price which is commonly referred to as currency. As with the other commodities, demand, and supply play a major role in determining its price by determining what amounts are needed hence facilitating their sale.

Exchange rates are the values of which a given currency may be exchanged or the value of one currency in comparison to another or others. Since all currencies vary and have different values, the exchange rate of a given currency is stated against a given currency and not against all the currencies.

Due to the daily changes in the currency values, there is a need to understand the dynamics behind that. This paper seeks to identify the causes of currency changes and the positive effects of a weak currency.

Exchange rates are constantly in change and are affected by a number of factors depending on the circumstances and the environment they are operating under.

The government is one of the biggest stakeholders in the money market. The values of a currency are of high concern to the government as they determine how the country will trade with the others. This is because the value of the currency determines the values of all other commodities from the given state and its rise or fall impacts on the relative values of the commodities. The government may influence exchange rates through changes in the monetary policies, involvement in the money markets, and through budgetary allocations.

Speculators are traders in the money markets who study the trends of money flows in the market and used this information to predict the probable reactions and trends in future. They then buy the currencies with the potential of gaining value and resell them at a profit when they appreciate. When this buying and selling is done on a large scale, the effects are either rise or fall of currency values.

Political climate is the state of the country of the currency origin. Paper money has no assurance that it will be transferable to the next person on need basis. This is because it has no backing except belief that the country of origin confidence in the money market will not waver. Political instability leads to a fast rate of descent of the value of the currency-related to that particular country as people fear accepting its money as a measure for exchange.

If there is political stability, the buyers and sellers have confidence in the currency and may even use it as a standpoint for gauging the other economies; this can be seen in the cases of euros, dollars and pounds.

Trade imbalances occurs when the rates of exports and imports between two countries vary and either of the countries has more imports or exports than its trade partner. Since these countries have to pay for the traded goods and services, one of the countries may accumulate more foreign currency than that other country has of the first country. This imbalance may lead to a change in the exchange rates when the two countries trade off their foreign currency for the domestic currency.

The difference in the purchasing power in two countries is a situation where a similar commodity costs different amounts of money when compared to two countries currencies. This would mean that a buyer could buy the object using the cheaper currency and sell it using the more expensive one hence making profits; as a result, the buying and selling leads to strengthening or weakening of the currencies.

Low rates of inflation tend to increase the value of the currency in relation to the others whose inflation is high. This will also lead to the use of lesser of the strong currency in the purchase of goods and services hence furthering the increase.

The interest rates offered by the banking institutions may increase the currency values when they are high due to the increased demand for the currency.

The nature of the economy is a key factor in determining the how investment is carried out in a country. The overall economy may result in more investments or the withdrawal of the investments by investors. These would affect the value of the currency.

In the process of foreign trade, the goods that are most sought for increase the values of their currencies due to the currency’s demand.

As a result of the continued economic crisis in the world, the values of the currencies are falling at high rates. This has led to the once strong currencies becoming weaker and weaker. The weakening of these currencies is not all that bad as they have their uses too.

The weakening of a currency acts to increase the preference for products from such a country as they will be lower in price as compared to similar goods from other parts of the world. The increased demand will act as a source of market for the local markets in the international trade.

The increased weakening of the currency will create external markets for the local companies while at the same time keeping the local markets safe for the domestic producers. This is because the weak currency will make imports more expensive and less preferable.

Trade deficit is a situation where the imports outweigh the exports in a given economy. The increase exports and reduction of imports due to the weakened currency will act to correct this deficit hence the countries attain a balance of trade.

Foreign investment is the incorporation of resources from outside the national borders into a country through investment. When the currency of a country weakens, the values of properties weaken relative to the currency making the country a target to the international investors. This foreign investment acts to strengthen the country’s economy.

Tourism is bound to increase as a result of the increased weakening of the currency. The exchange rates changes making commodities in the country with the weak currency cheaper. This attracts more tourists as they will see this as an opportunity to travel at reduced costs.

The weakening of the currency leads to increased employment opportunities in the affected economy. This is where the weak currency leads to increased foreign investment and domestic production increases due to the increased demand for the locally produced goods. This will result in increased employment opportunities in the manufacturing sector together with other areas affected by the investments.

The exchange rates of currencies in any economies are determined by a variety of factors which are dependent on various factors that are determined by the specific environment the currencies are operating in together with the global environmental; these factors range from social, political, economical and even religious in scope.

As the currencies change, they either strengthen or become weaker. Weaker currencies, though associated with a number of ails, have shown to have some advantages to the country as well as the whole world as the goods and commodities produced in the country become cheaper as does the cost of being in that country to the outsider.