Five factors influencing foreign exchange rates

. 3 min read

As well as determining the value at which one country’s currency converts into another, the Foreign Exchange rate (ForEx rate) is one of the key indicators for measuring a country’s relative economic strength. A variety of economic, political and market pressures can cause the exchange rate to fluctuate, which is why anyone sending or receiving currency internationally may wish to keep a careful eye on it.

To help you understand why the value of a currency can rise and fall in relation to others, here is a simple guide to some of the key factors that can influence exchange rates.

1. The rate of inflation

Inflation measures the rise in the prices paid for general goods and services. When the rate of inflation is higher than other countries, purchasing power decreases, which may reduce the value of the currency on the international markets. Conversely, a country with a low inflation rate would expect to experience a rise in the value of its currency.

2. The Bank of England base rate

Interest is what you pay for the privilege of borrowing money. The base rate set by the Bank of England influences all the other interest rates in the economy. When interest rates increase it tends to put upward pressure on the country’s currency. This is because foreign capital is more likely to be attracted by the increased income received on loans, and the increase in demand causes the value of the currency to rise.

3. The Balance of Payments

The transactions between the residents of a country and the rest of the world can be combined to provide a net figure known as the balance of payments. This figure influences the supply and demand for the country’s currency and consequently can affect its exchange rates. If more has been spent on importing products than has been earned through exports, for example, a deficit occurs, which may cause the value of the currency to fall.

4. Government debt

The amount of money a government has to borrow to finance its planned expenditure is known as the government debt. Governments typically accomplish this by issuing bonds or other securities. If investors suspect a country’s borrowing is becoming too high or unmanageable, they may choose to sell their assets in that currency on the open market, leading to a fall in the value of the currency.

5. Speculation

Trading in assets inevitably involves an element of risk. Speculators weigh the possibility of making a gain against the possibility of making a loss and invest accordingly. When investors choose to speculate on a currency, it can affect exchange rates. For example, if investors believe a currency is about to rise in value, they may buy more of it in the hope of selling it in the future for a profit. This increase in demand can cause the exchange rate to rise.

Anyone sending or receiving money internationally is, to some extent, at the mercy of all these factors. But XE has a range of options to help you avoid the potential pitfalls of a fluctuating currency. Whether you are buying property, sending money to a family member or paying for a holiday, XE can help you make your money transfers quickly, easily, securely and at minimal cost

To find out more or to discuss your personal situation in more detail, please contact us.


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While we take reasonable care to keep the information on the website accurate and up to date, there may be occasions when this is not possible. Case Studies and articles are not intended to predict future moves in exchange rates or constitute advice.

XE makes no representations, warranties, or assurances as to the accuracy or completeness of any information derived from third party sources. If you are in any doubt as to the suitability of any foreign exchange product that you are intending to purchase from XE, we recommend that you seek independent financial advice first.

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