Currency Exchange Rate

Currency Exchange Rate

The exchange rate of currencies in one country is usually a measure of the level of an advanced economy or not a country. In addition to inflation and interest rates.

Currency value plays an important role in trade between countries. Especially when many countries are involved in the activities of the free market economy. The existence of this currency exchange rate affects the profit or return of the investment portfolio.

The exchange rate of one country’s currency with another country is different. This will also affect trade activities between the two countries. When a currency exchange rate strengthens, it will cause the value of state exports to be more expensive. Conversely, imports from other countries actually become cheaper. And vice versa.

What affects the exchange rate of a currency? Well, here are some things that can cause currency exchange movements between two countries:

Different Inflation Rate Between Two Countries

Generally, a country that has a low stable inflation rate has a stronger exchange rate. Compared to countries with high inflation. This is due to the purchasing power of the currency will become larger than other countries. Countries with low inflation include Germany, Japan, Switzerland, the United States and Canada.

Differences in Interest Rates between Two Countries

The relationship between interest rates, inflation and exchange rates is very close. A country’s central bank can change the interest rate. It can affect inflation and currency exchange rates.

The existence of higher interest rates will result in high demand for the country’s currency. This is beneficial because many domestic and overseas investors are investing in the country. Considering they are interested in a greater return or profit.

Conditions for Economic and Political Stability

If a country is safe in terms of politics and economy, of course, investors will become easier to invest in the country. Countries with unstable political conditions will have a high risk of failing to invest. Political circumstances certainly affect economic performance. In addition, it concerns the confidence of investors and influences the exchange rate of the country’s currency.

Balance Sheet

A trade balance between two countries consists of all proceeds of sale and purchase of goods and services. It is called a deficit trade balance when a country pays more to a partner country.

Related to this, the country needs more currency from its trading partner country. This will cause the country’s currency exchange rate to be weak. Instead, it is called a surplus balance sheet when the value of its currency strengthens against the trading partner country.

Export Price Ratio and Import Price

If export prices increase faster than import prices, then the value of the country’s currency becomes stronger. This is in line with the increasing demand for goods and services. On the other hand, if import prices rise compared to export prices.

Public Debt

A country’s domestic budget balance is also used to finance public and government interests. If the budget deficit, then the public debt swell.

The high public debt will cause an increase in inflation. The budget deficit can be closed by selling government bonds or printing money. Things can get worse if a large debt causes the country default (default). So the debt rating down. The high public debt will obviously weaken the exchange rate of the country’s currency.

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