THE FACTORS THAT INFLUENCE EXCHANGE RATE:

1. Exports & Imports

   A country’s trade balance is the difference between a country’s exports and its imports. If a country’s exports exceed its imports, it will register a trade surplus. However, if the country’s imports exceed its exports, it will register a trade deficit. Countries with large trade surpluses tend to have stronger currencies while countries with large trade deficits tend to have weaker currencies.

2. Capital Flows

   Capital flows are inflows or outflows of funds from a country for the purposes of investment in financial assets, real estate or business enterprisers.

   If capital inflows exceed capital outflows from a country, the country will register a capital account surplus, which is positive for its currency. If capital outflows exceed capital inflows, the country will register a capital account deficit which is negative for its currency.

   Countries with sustained capital account and trade surpluses will build up reserves of foreign currency over time.

3. Interest Rates

   A country’s currency is also affected by changes in domestic interest rates against offshore interest rates. If domestic interest rates rise in comparison to offshore interest rates, this will lead to an increase in fund inflows from abroad to capitalize on potentially higher rates of return on fixed income instruments, leading to a stronger domestic currency. If offshore interest rates rise in comparison to domestic interest rates, this will lead to an increase in fund outflows to capitalize on potentially higher rates of return on foreign fixed income instruments, resulting in a weaker domestic currency.

4. Inflation Rate

   A relatively higher domestic inflation rate compared to other countries will dampen the purchasing power of the domestic currency as prices of local goods & services increase at a faster rate than foreign goods, leading to a weaker domestic currency. A relatively lower domestic inflation rate compared to other countries will strengthen the purchasing power of the domestic currency as the prices of local goods a services increase at a slower rate than foreign goods, leading to a stronger domestic currency.

5. Sovereign Debt Level

   The level of a country’s exchange rate also depends on its financial position. A large and rising sovereign debt level relative to the country’s economic base as measured by its Gross Domestic Product GDP may be a cause for concern to foreign investors as they will be less willing to invest in countries with potentially higher levels of default risks on their debt obligations. Thus, countries that manage their debt levels well and which enjoy stronger financial positions are likely to experience relatively stronger and more stable currencies.

6. Political Outlook

   A nations which has stable government is expected to be more attractive to foreign investors ad have a stronger currency as there is a lower perceived risk of political change that may adversely affect foreign investors’ investments.

7. Central Bank Monetary Policy

   A country’s central bank may intervene in the foreign exchange market by buying or selling domestic currency on the foreign exchange market in order to manage its exchange rate. An expansionary monetary policy generally results in an increased supply of money, lower interest rates and a weaker currency. Similarly, a tightening in monetary policy results in a reduced in a reduced supply of money and a firmer currency. Higher currency valuations make for less competitive exports, while lower currency valuations can help improve exports and drive the economy forward.

It is important to have an understanding of the factors which affect exchange rate as returns on foreign investments can be impacted by currency movements. An appreciation in the exchange rate of a foreign currency against the local currency will lead to higher investment returns when we convert the foreign investments back into the local currency. Similarly, a depreciation in the exchange rate of a foreign currency against the local currency will lead to lower investment returns when we convert the foreign investments back into the local currency

THE FACTORS THAT INFLUENCE EXCHANGE RATE:

1. Exports & Imports

   A country’s trade balance is the difference between a country’s exports and its imports. If a country’s exports exceed its imports, it will register a trade surplus. However, if the country’s imports exceed its exports, it will register a trade deficit. Countries with large trade surpluses tend to have stronger currencies while countries with large trade deficits tend to have weaker currencies.

2. Capital Flows

   Capital flows are inflows or outflows of funds from a country for the purposes of investment in financial assets, real estate or business enterprisers.

   If capital inflows exceed capital outflows from a country, the country will register a capital account surplus, which is positive for its currency. If capital outflows exceed capital inflows, the country will register a capital account deficit which is negative for its currency.

   Countries with sustained capital account and trade surpluses will build up reserves of foreign currency over time.

3. Interest Rates

   A country’s currency is also affected by changes in domestic interest rates against offshore interest rates. If domestic interest rates rise in comparison to offshore interest rates, this will lead to an increase in fund inflows from abroad to capitalize on potentially higher rates of return on fixed income instruments, leading to a stronger domestic currency. If offshore interest rates rise in comparison to domestic interest rates, this will lead to an increase in fund outflows to capitalize on potentially higher rates of return on foreign fixed income instruments, resulting in a weaker domestic currency.

4. Inflation Rate

   A relatively higher domestic inflation rate compared to other countries will dampen the purchasing power of the domestic currency as prices of local goods & services increase at a faster rate than foreign goods, leading to a weaker domestic currency. A relatively lower domestic inflation rate compared to other countries will strengthen the purchasing power of the domestic currency as the prices of local goods a services increase at a slower rate than foreign goods, leading to a stronger domestic currency.

5. Sovereign Debt Level

   The level of a country’s exchange rate also depends on its financial position. A large and rising sovereign debt level relative to the country’s economic base as measured by its Gross Domestic Product GDP may be a cause for concern to foreign investors as they will be less willing to invest in countries with potentially higher levels of default risks on their debt obligations. Thus, countries that manage their debt levels well and which enjoy stronger financial positions are likely to experience relatively stronger and more stable currencies.

6. Political Outlook

   A nations which has stable government is expected to be more attractive to foreign investors ad have a stronger currency as there is a lower perceived risk of political change that may adversely affect foreign investors’ investments.

7. Central Bank Monetary Policy

   A country’s central bank may intervene in the foreign exchange market by buying or selling domestic currency on the foreign exchange market in order to manage its exchange rate. An expansionary monetary policy generally results in an increased supply of money, lower interest rates and a weaker currency. Similarly, a tightening in monetary policy results in a reduced in a reduced supply of money and a firmer currency. Higher currency valuations make for less competitive exports, while lower currency valuations can help improve exports and drive the economy forward.

It is important to have an understanding of the factors which affect exchange rate as returns on foreign investments can be impacted by currency movements. An appreciation in the exchange rate of a foreign currency against the local currency will lead to higher investment returns when we convert the foreign investments back into the local currency. Similarly, a depreciation in the exchange rate of a foreign currency against the local currency will lead to lower investment returns when we convert the foreign investments back into the local currency

THE FACTORS THAT INFLUENCE EXCHANGE RATE:

1. Exports & Imports

   A country’s trade balance is the difference between a country’s exports and its imports. If a country’s exports exceed its imports, it will register a trade surplus. However, if the country’s imports exceed its exports, it will register a trade deficit. Countries with large trade surpluses tend to have stronger currencies while countries with large trade deficits tend to have weaker currencies.

2. Capital Flows

   Capital flows are inflows or outflows of funds from a country for the purposes of investment in financial assets, real estate or business enterprisers.

   If capital inflows exceed capital outflows from a country, the country will register a capital account surplus, which is positive for its currency. If capital outflows exceed capital inflows, the country will register a capital account deficit which is negative for its currency.

   Countries with sustained capital account and trade surpluses will build up reserves of foreign currency over time.

3. Interest Rates

   A country’s currency is also affected by changes in domestic interest rates against offshore interest rates. If domestic interest rates rise in comparison to offshore interest rates, this will lead to an increase in fund inflows from abroad to capitalize on potentially higher rates of return on fixed income instruments, leading to a stronger domestic currency. If offshore interest rates rise in comparison to domestic interest rates, this will lead to an increase in fund outflows to capitalize on potentially higher rates of return on foreign fixed income instruments, resulting in a weaker domestic currency.

4. Inflation Rate

   A relatively higher domestic inflation rate compared to other countries will dampen the purchasing power of the domestic currency as prices of local goods & services increase at a faster rate than foreign goods, leading to a weaker domestic currency. A relatively lower domestic inflation rate compared to other countries will strengthen the purchasing power of the domestic currency as the prices of local goods a services increase at a slower rate than foreign goods, leading to a stronger domestic currency.

5. Sovereign Debt Level

   The level of a country’s exchange rate also depends on its financial position. A large and rising sovereign debt level relative to the country’s economic base as measured by its Gross Domestic Product GDP may be a cause for concern to foreign investors as they will be less willing to invest in countries with potentially higher levels of default risks on their debt obligations. Thus, countries that manage their debt levels well and which enjoy stronger financial positions are likely to experience relatively stronger and more stable currencies.

6. Political Outlook

   A nations which has stable government is expected to be more attractive to foreign investors ad have a stronger currency as there is a lower perceived risk of political change that may adversely affect foreign investors’ investments.

7. Central Bank Monetary Policy

   A country’s central bank may intervene in the foreign exchange market by buying or selling domestic currency on the foreign exchange market in order to manage its exchange rate. An expansionary monetary policy generally results in an increased supply of money, lower interest rates and a weaker currency. Similarly, a tightening in monetary policy results in a reduced in a reduced supply of money and a firmer currency. Higher currency valuations make for less competitive exports, while lower currency valuations can help improve exports and drive the economy forward.

It is important to have an understanding of the factors which affect exchange rate as returns on foreign investments can be impacted by currency movements. An appreciation in the exchange rate of a foreign currency against the local currency will lead to higher investment returns when we convert the foreign investments back into the local currency. Similarly, a depreciation in the exchange rate of a foreign currency against the local currency will lead to lower investment returns when we convert the foreign investments back into the local currency

THE FACTORS THAT INFLUENCE EXCHANGE RATE:

1. Exports & Imports

   A country’s trade balance is the difference between a country’s exports and its imports. If a country’s exports exceed its imports, it will register a trade surplus. However, if the country’s imports exceed its exports, it will register a trade deficit. Countries with large trade surpluses tend to have stronger currencies while countries with large trade deficits tend to have weaker currencies.

2. Capital Flows

   Capital flows are inflows or outflows of funds from a country for the purposes of investment in financial assets, real estate or business enterprisers.

   If capital inflows exceed capital outflows from a country, the country will register a capital account surplus, which is positive for its currency. If capital outflows exceed capital inflows, the country will register a capital account deficit which is negative for its currency.

   Countries with sustained capital account and trade surpluses will build up reserves of foreign currency over time.

3. Interest Rates

   A country’s currency is also affected by changes in domestic interest rates against offshore interest rates. If domestic interest rates rise in comparison to offshore interest rates, this will lead to an increase in fund inflows from abroad to capitalize on potentially higher rates of return on fixed income instruments, leading to a stronger domestic currency. If offshore interest rates rise in comparison to domestic interest rates, this will lead to an increase in fund outflows to capitalize on potentially higher rates of return on foreign fixed income instruments, resulting in a weaker domestic currency.

4. Inflation Rate

   A relatively higher domestic inflation rate compared to other countries will dampen the purchasing power of the domestic currency as prices of local goods & services increase at a faster rate than foreign goods, leading to a weaker domestic currency. A relatively lower domestic inflation rate compared to other countries will strengthen the purchasing power of the domestic currency as the prices of local goods a services increase at a slower rate than foreign goods, leading to a stronger domestic currency.

5. Sovereign Debt Level

   The level of a country’s exchange rate also depends on its financial position. A large and rising sovereign debt level relative to the country’s economic base as measured by its Gross Domestic Product GDP may be a cause for concern to foreign investors as they will be less willing to invest in countries with potentially higher levels of default risks on their debt obligations. Thus, countries that manage their debt levels well and which enjoy stronger financial positions are likely to experience relatively stronger and more stable currencies.

6. Political Outlook

   A nations which has stable government is expected to be more attractive to foreign investors ad have a stronger currency as there is a lower perceived risk of political change that may adversely affect foreign investors’ investments.

7. Central Bank Monetary Policy

   A country’s central bank may intervene in the foreign exchange market by buying or selling domestic currency on the foreign exchange market in order to manage its exchange rate. An expansionary monetary policy generally results in an increased supply of money, lower interest rates and a weaker currency. Similarly, a tightening in monetary policy results in a reduced in a reduced supply of money and a firmer currency. Higher currency valuations make for less competitive exports, while lower currency valuations can help improve exports and drive the economy forward.

It is important to have an understanding of the factors which affect exchange rate as returns on foreign investments can be impacted by currency movements. An appreciation in the exchange rate of a foreign currency against the local currency will lead to higher investment returns when we convert the foreign investments back into the local currency. Similarly, a depreciation in the exchange rate of a foreign currency against the local currency will lead to lower investment returns when we convert the foreign investments back into the local currency