Factors Affecting The Foreign Currency Exchange

By November 21, 2019 No Comments

The economy of a country depends on several factors. There are several factors that accelerate as well as deaccelerate the growth of the economy of a country. Currency of a country plays an important role in determining the position of the country’s economy at the global level. All currencies of the world are not equal relatively. Countries with relatively smaller economies have lewer value currency than the countries with developed economies. This creates a wide economic disparity between the countries. This is where the Foreign Currency Exchange comes into play.

What is the Foreign Exchange?

Foreign exchange or forex is the process of converting one’s own native currency into international banknotes at some fixed exchange rates. These exchanges have varied ramifications on the global economy. In an open economy, a country’s currency is valued according to the law of supply and demand.

In simpler words, a currency’s value can be pegged to another country’s currency or even to a basket of currencies. The exchange rate can also be defined as the rate at which the market converts one currency into another. Companies and governments deal in foreign currency with respect to international business.

Purpose of Currency Exchange

Currency exchange has wide uses and applications. Big companies, investors, governments want to be able to exchange one currency into another. A business’s primary purpose for wanting to be able to exchange money is to buy or provide services through paying or receiving money at the international level.

It helps them boost their business across the borders of the native country. Different clients of different countries need to be paid in their specific currencies. This conversion is done by the bank and the bank debits your account with the desired currency according to the latest exchange rates.

How does it Work?

The working of the Foreign Currency Exchange is quite understandable. The market decides the value of most of the currencies which are known as the exchange rate. This exchange rate is different for different currencies. Foreign exchange can be as simple as exchanging money from a local bank. It can also be done by trading the currency into the foreign exchange market.

Currencies are represented in pairs against each other, along with their price, to compare their values. For example, USD/CAD refers to the comparison of US dollars vs Canadian dollars. If a price of 1.2569 is given along with it, it will mean that the price of converting one Canadian dollar for one US dollar is 1.2569.

Currency exchanges also take place in lots, known as micro, mini or standard lots. A micros lot is 1000 worth of the given currency, a mini lot is 10000 worth of the given currency, a standard lot is 100000 worth of the given currency. There are many factors affecting the foreign exchange rate at a given instant of time.

Inflation Rates

Changes in market inflation can cause fluctuation in currency exchange rates. A country with a low inflation rate sees an appreciation in the value of its currency. A low inflation rate promotes a slow increase in the prices of goods and services. A country with a lower inflation rate exhibits a rising currency value whereas a country with a high inflation rate shows low currency value with higher interest rates.

Country’s Current Account

The current account of a country shows the balance of trade and earnings on foreign investment. It consists of the total number of transactions involving exports, imports, etc.

Spending more of its currency on importing products than it is earning through the sale of its exports causes depreciation resulting in the deficit in the current account of the country. The balance of payments affects the exchange rates of its domestic currency.

All the above-mentioned factors affect Foreign Currency Exchange rates. If you send or receive money from foreign clients on a regular basis, you must be up to date with the current exchange rates. Spread your business by exchanging foreign currency to other regions.

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