Factors That Affect the Currency Exchange Rates

It is important to know how currency exchange rates operate, especially if you fall under the categories of vacationers, currency traders, investors, or business persons. What are some of the things that affect the fluctuating trends of currency exchange rates? Listed below are some factors that impact rates used for currency exchange in Calgary:

Supply and demand

Currency can be purchased and sold similar to bonds, stocks, or any other investments. Like any other investments and items that can be bought or sold, supply and demand affect the price. Supply and demand is a primary basic principle that serves as a determining factor in the fluctuation of the currency exchange rates.

Political stability

The government provides currency. For a currency to exist or retain a particular value, the government leadership has to be powerful. Regions with political uncertainty resulting from wars or revolutions have weaker currencies due to an unpredictable future, hence weak governments. For people trading currencies, such currencies are avoided as it is considered a great risk of losing your investment; hence choose to invest elsewhere with other currencies. With less demand for a currency, the price or cost drops.

Economic status

The economy is a significant factor, just like political stability. Currency traders will rarely purchase currency of a weakly backed up economy, making the demand and value of the currency drop. A strong economic status results in a strong currency, while a shaky economy will lower the value. For this reason, employment levels, GDP, and other economic determinants are closely assessed by currency trade investors prior to buying a currency.

Inflation

Lower inflation increases the value of a currency, while higher inflation leads to the dropping of the currency’s value. In some scenarios, inflation is beneficial: it portrays the growth of the economy. On the contrary, higher inflation rates in most scenarios may lead to increased currency supply without a similar growth in the country’s assets’ real value. With a high circulation of currency, the value of the currency will fall. Hyperinflation leads to the currency being rendered worthless.

Rate of interest

When the interest rates are high, investors are willing to buy the currency, which leads to an increase in the currency’s value: this, in return, boosts the region’s economy. The majority of countries in some instances provide a high-interest rate but still have a low currency value since regardless of the profit incentive from high-interest rates, currency traders are aware of the economic and political risks as well as other factors affecting the rates and hence refrain from investing in that particular currency.

Trade balance

Trade balance refers to how much a region imports vs. how much is imported by the region. This is a crucial factor and determinant of the currency exchange rates. In simple terms, the balance of trade results from subtracting the exports value from the imports value. For a region with a trade deficit, the import value is higher than the exports value. There is a trade surplus in the scenario that the exports value is greater than the imports value.

It is vital to understand the currency exchange rates to make the most out of your investment as a trader or investor. It is also advantageous to you as a traveler or vacationer as it helps you get the most out of your spending.

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