Fluctuations in international currency rates, commonly known as exchange rates, are a normal part of economic and business cycles. At the base of all rate changes are supply and demand forces that set currency rates based on the monetary flow of individual currencies. Much of what affects currency rates is the anticipation of future changes in economic fundamentals, political situations and currency stability of a country.
Inflation and Recession
Inflationary periods and recessions both directly relate to the ability of a country to buy goods and services on the international market. Recession periods decrease purchasing power and decrease the value of the currency. Periods of inflation increase the purchasing power of a country, which leads to an increase in the value of the currency.
According to the International Fisher effect, interest rates impact exchange or currency rates. The futures price of a currency, or the anticipated price at a spot time in the future, incorporates a currency's interest rate into the price. This theory assumes that the difference between exchange rates of any two currencies is equivalent to the difference in interest rates. Also, if interest rates are expected to rise, currency rates tend to increase, while anticipated interest rate decreases lower the value of a currency.
Anticipated changes in the economic fundamentals of a currency can have an immediate impact on currency rates. Economic fundamentals are noted through economic data reports, interest rates, changes in a country's monetary policy, international investments and international business levels. If information is released that indicates a currency is becoming unstable, like a slowing of economic growth, the value of a currency typically declines. Likewise, if reports show added international investments and economic growth, a currency's value is strengthened.
Political disruptions or instability can negatively impact currency rates. When a country is politically stable, it is seen as a good place for business and economies to thrive, especially if political decisions are made that enhance the business environment. Currency rates are stable in calm political situations, while disruptive political environments decrease the value of currencies.
The foreign debt of a country can impact currency rates. When the foreign debt is reasonable and the ability of the country to meet debt obligations is strong, currency values are higher. When foreign debt is high and the country's ability to make debt payments is questionable, currency rates tend to decrease.
- Photo Credit v_hujer/sxc.hu
How Do High Interest Rates Affect Businesses?
Interest rates represent the cost of borrowing, or the cost of obtaining money. Though central banks can influence interest rates by adjusting...
Value of Political Buttons
As with other collectibles, the biggest factor in the value of campaign buttons is how highly other collectors prize them. Determining the...
What Determines the Value of Currency?
The value of currency is determined by its selling and purchase price as a commodity. This is affected by the amount of...
The Effects of Interest Rates on Currency Rates
Foreign exchange is critical to coordinate international payments. Further, investors trade currencies to make profits. Interest rate fluctuations are factors that should...
How an Exchange Rate Affects a Business
Exchange rates have a significant effect on companies that do business globally. When companies exchange products or services across borders causing two...
How to Calculate Growth Rate or Percent Change
Percent change is a common method of describing differences due to change over time, such as population growth. It is popular because...
How to Increase Purchasing Power
Increasing the purchasing power of your household is a matter of getting more for every dollar you earn. This has more benefits...
The Difference Between Domestic Business Strategy & Global Business Strategy
Differences between domestic and global business strategies result from the way management allocates the company's resources to expand into global markets.
How Interest Rates Affect Currency
The prevailing rate of interest at which lenders are willing to loan borrowers money depends on a number of factors. For example,...
The Effects of the Political Environment on Business Organizations
The political environment in a country affects business organizations and could introduce a risk factor that could cause them to suffer a...
Factors That Can Affect the Appreciation or Depreciation of Currency
The value of currency in any country rarely stays constant. Currency values usually continuously fluctuate. These fluctuations can be large or small...