Key Factors That Impact The Foreign Exchange Rates

The foreign exchange rate is one of the primary determinants of the economic health of a country. The fluctuations and the direction of the movement signify the trends of development of a country with respect to the others. This also keeps the country in a position to make a comparison of its economic dimensions with respect to the rest of the countries for a dynamic assessment of the progress. 

Instability in rates is a stable feature for currency exchange in UK and the same is consequent upon certain factors that rule the foreign trade markets across the countries. Here are some of the factors that impact the rates substantially to move in either direction. 

 Inflation rate refers to the sustained rise in general price levels. When the inflation rates are changed owing to some microeconomics factors of the market, the foreign trade also grows sensitive to it. As the economic dynamism propose, the country with a lower inflation rate with respect to another is expected experience an appreciation in the exchange rates. If the low levels of inflation can be sustained for a substantial period, the country earns all the potential to experience steady growth in the currency value. 

 Dominantly a microeconomics factor, rate of interest of an economy has a part to play in deciding the exchange rates. When the interest rates show an upward rising trend, the exchange rates move higher appreciating the value of the currency. The underlying mechanism is quite simple. As the rate of interests moves up, the foreign investors increase the volume of investment enhancing the flow of foreign currency towards the country. This, in turn, increases the exchange rate in favour of the country. 

Foreign exchange rates are directly related to the terms of trades. It refers to the ration of import prices and export prices. Prices are dynamic components and when the export prices rise at a higher rate than the import prices, the country earns substantial revenue from overall foreign trading. This compels the exchange rates to go up resultant upon a higher demand for the country’s currency. 

Current accounts of a country deal with foreign investment earning and balance of trade. The primary components of current accounts are imports, exports, debt, etc. when the import component exceeds the export dealings, the expenditure of foreign currency becomes higher than the earning of it. This reflects a deficit in the current accounts which pushes the exchange rates down. 

Government debt means the nation’s debt and the central government remain accountable for the same. With substantial volumes of debts, a country fails to acquire foreign capital which, in turn, causes inflation. Higher inflation rates always come with lower exchange rates making the value of the currency depreciate. 

Money exchange in UK trading can always be a beneficial and profitable avenue if the market dynamism are studied and comprehended properly. The trends, speculations and the economic factors always play a critical role in deciding the fate of the foreign exchange market.