3 Major Determinants of Currency Exchange Rates.
Currency exchange rates are significant to traders in the foreign exchange market; they account for the gain and/or loss of profits. They are the tools for identifying the value of a currency in relation to another and consequently, allow you to determine different strategies to maximize a winning position. Alongside, their abilities to inflate and fluctuate can be used to assess the economic condition of a country. For a newbie trader, it’s important to be familiar with the different factors that can influence your trades.
Here’s a list of the 3 major determinants:
1. International debts
The international debts of countries drive the value of currency exchange rates. This is due to the fact that amounts borrowed from other countries can cause inflation. 3 Major Determinants.
It is a given that certain countries may incur hefty international debts over time. Although herding in amounts may improve local economy, it brings negative remarks on global markets and makes a particular country less attractive. Consequently, governments might not hesitate to increase currency exchange rates, as well as participate in large-scale financing alternatives as a means to eliminate the load.
2. Current account deficits
By definition, current account deficits are measurements of a country’s approach of over-importing goods and services. It also includes settlements, dividends, and interest rates concerning other nations – basically, all financial transactions regarding trading activity. 3 Major Determinants
Current account deficits are determinants of exchange rates due to their role in a country’s economic activity. It follows that if the amount of imported goods and services outrank exports, average exchange rates are achieved. Conversely, if the amount of exported goods and services outrank imports, inflated exchange rates can be expected.
3. Interest rates
Interest rates are among major determinants of currency exchange rates due to their reflection of a borrower’s need from a lender. Usually, they are determined based on risk levels. If a party’s lack of supplies is obvious, they may be set high, and in turn, exchange rates will be affected.
Moreover, interest rates have a direct influence on currency exchange rates. Since they can attract many foreign investors, they can be set by a country’s central bank to carry higher numbers. Particularly, they can increase a country’s foreign capital and dramatically improve economic condition. If they vary frequently, exchange rates will vary as frequently, too.