money transfer and foreign exchange rate

Five Factors Affecting the Foreign Exchange Rates

We have talked about foreign exchange rates in one of our previous blogs. And, you know how foreign exchange rates play an essential role while sending money abroad. The exchange rate is also one of the most critical means through which a country’s economic health is determined. A country’s currency value provides a window to its financial stability. This attribute is one of the primary reasons, experts constantly monitor and analyze its foreign exchange rates. 

In simple words, an exchange rate is a value that one country’s money may fetch against another. It varies every day due to the dynamic market forces of demand and supply of currencies from one country to another. Thus, you need to keep a keen eye on the currency exchange rates if you regularly remit money abroad.

This article will analyse some of the leading determinants that affect the shifts and variations in exchange rates. And further examine the reasons behind their buoyancy, helping you determine the best time to send money back home.

Inflation

Fluctuations in market inflation cause changes to the exchange rates. A country with lower inflation compared to another will experience a better value for its currency. With low inflation, the prices of goods and services increase slowly, contributing to that money’s higher purchasing power. In contrast, countries with higher inflation will experience a decline in their currency values, given their decreased purchasing power.

Interest Rates

Changes in interest rates also impact the currency value and foreign exchange rates. Inflation, interest rate, and foreign exchange valuations are all interconnected. An increase in interest rates causes a country’s currency to appreciate as lenders experience greater returns with higher interest rates. Thus, attracting more international capital, which causes a surge in the exchange valuations.

Country’s Current Account

The current account of a country reflects the balance of trade and income from foreign investments. It involves the total number of transactions, including its debt, imports, exports, amongst other things. A deficit in the current account due to a higher spend on importing goods vis-a-vis exports causes depreciation. Balance of payments causes fluctuation in the currency exchange rate of an economy.

Political Stability & Performance

A country’s economic performance and political state can affect its currency strength. A country with a high risk of political turbulence is not attractive to foreign investors. Investors seek markets that offer higher political and economic stability. Thus, an increase in foreign investment translates into a more excellent value of the domestic currency. 

Recession

Recession is a significant factor that can affect exchange rates. If an economy is going through a recession, its interest rates are more likely to slip, lowering its chances to procure foreign investment. As a result, the currency valuation will dip in comparison to that of other countries.

Conclusion

All the above factors determine the fluctuation in the foreign exchange rate. If you send money abroad frequently, staying informed of all these factors will enable you to choose the best time for your cross-border money transfers. 

We at ATL Money Transfer continuously monitor the exchange rates. Using our platform, you can send money globally with fair exchange rates. For more information, please visit our website www.atlmoneytransfer.com or write to us at support@atlmoneytransfer.com. 

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