Important For Traders! Knowing the Influence Factors on Currency Exchange Rates
Influence of Exchange Rate – One of the tools you usually use to measure how prosperous a country is is to look at the exchange rate of its currency. In a trade transaction or import export, the exchange rate can play a very important role, let alone the third is globalization. Almost all countries in the world are seen in free trade activities. Exchange rates are also very important for traders to know, because it is the currency that will affect forex trading activities.
What is currency exchange rate?
Definition of exchange rates according to one economic figure, Salvatore, the exchange rate is the price of a currency in another currency or the value of a currency at the value of another currency. The exchange rate of a particular country currency will usually be fluctuating and expressed in a comparison with other national currencies. If the value of the currency strengthens, the export value of a product from the country concerned will be affected and become higher. So if the currency weakens, the effect will also affect the value of imported goods from other countries.
CAUSES OF FLUCTUATE EXCHANGE RATE
An increase in a domestic exchange rate is called an appreciation of foreign currency. While depression is a decrease in the domestic exchange rate of foreign currencies. These are some of the causes that cause the exchange rate to continue to fluctuate.
Countries that have a high level of economic prosperity will usually tend to be consistently low for the inflation rate so that the value of a currency will become even stronger when compared to other countries that have high inflation rates such as Indonesia. This is what will cause purchasing power.
Countries that fall into the category of high prosperity levels such as Germany, Japan, Switzerland, America, Canada. In a country that has a high inflation rate, the value of its currency will continue to be depressed compared to its counterparty of trading transactions.
In the basic forex market which is the most important is international transactions. Both in commodity services or goods, so changes in prices in the country will not remain at foreign prices which have an impact on foreign exchange movements.
2. Interest rates
The exchange rate of a currency, inflation and also interest rates have a very strong relationship. For example, like Indonesia, can intervene in order to overcome inflation and affect the exchange rate of the currency by changing the interest rate. If it turns out that Indonesia’s interest rates are high, the demand for rupiah can also increase, and investors, both local and foreign, will be very interested in investing for higher profits.
However, if it turns out that inflation is rising, investors will come out so they can avoid losses until interest rates rise again. So, if Indonesian banks reduce open rates, the exchange rate will also weaken.
3. Trade balance
The trade balance is a payment of export proceeds and also imports of goods or services from 2 countries that are related to trading activities. If a country is spending more money to be able to pay its trading country counterpart than the amount that will be received as payment from its export product, then that country will experience a deficit condition.
Furthermore, the country is in dire need of more currencies from its trading partner countries which can have an impact on the country’s exchange rate depreciation on the counterparts of its trading countries.
4. Public debt
In addition to conducting trade activities with other countries, the budget balance of a country will also be used as one of the domestic project support for the benefit of its government and society. The budget deficit will trigger an increase in public debt or also called public debt and this will lead to an increase in the value of inflation.
5. Export and import activities
If it turns out that the number of exports of a particular country’s goods or services experiences an increase compared to the value of its exports, then it is certain that the exchange rate in the country’s currency usually strengthens. With an increase in export commodities both goods and services means that demand for currencies will also increase. But on the contrary, if it turns out that the import value is higher than the number of exports, the country may experience a deficit condition until the exchange rate weakens.
5. Economic and political conditions
In order to be able to invest in funds, investors will certainly make elections in countries that have the best economic conditions, including stable and safe political conditions. Because of the unstable economic conditions automatically will greatly affect the confidence of investors because they tend to have a higher risk as a place to issue funds. So that the political situation greatly impacts the condition of a country’s exchange rate.
In the forex market or foreign exchange the factors that will affect demand and supply are real growth rates for foreign products. The rate of increase in real domestic income will certainly be predicted to begin to weaken in terms of foreign exchange rates. While the domestic real income will result in increased foreign exchange demand compared to existing stock.
8. Control from the government
Government policies are also considered to play a role and influence the value of a currency in various forms. One of the reasons why the government intervenes on the money market is to help smooth the changes in the value of a currency and make it stable.
Those are some things that will affect the exchange rate of a currency. As a beginner, this information is certainly very important because the condition of the currency value will have a big effect on your forex trading activities.