Inflation and Interest rates affecting currency values

Inflation And Interest Rates Affecting Currency Values.

Inflation and interest rates, Country’s currency either going up or down against other currencies.

However, very few people understand what drives the financial aseets like(currencies, bonds, indices, stocks, commodities) movement or how this affects the stock market.

So let me explain first what is currency prices determined by supply and demand or the amount of buying and selling of various currencies in the foreign exchange market.
As it like a stock trading on the stock market, the price of a currency will fluctuate throughout the day on the FX market, with the forces of supply and demand determining whether the currency rises or falls.

When there are more buyers less sellers than price’s of currency increase.

And there are more sellers less buyers than currency will fall, but what drives this supply and demand.

Consider the five factors that affect currency prices.

Interest Rates (Inflation and Interest rates).

inflation and interest rates

Firstly rises in interest rates in a country will result in that currency appreciating, and because a high-interest rate provides better incentives for individuals to invest in cash.

Rising interest rates will also attract more foreign capital into the country, and as a result, demand for the currency increases, which will see the currency rising value.

On the other hand, a lower interest rate means lower returns on cash investments, making it less attractive.

This can result in a currency falling in value as investors move cash away from a country into other markets.

Inflation (Inflation and Interest rates).

inflation and interest rate

The second factor is inflation; countries with lower inflation levels caused a currency to appreciate, and there is less money being injected into the economy.

When inflation is low, the cost of goods and services will rise quite slowly.

The opposite occurs when inflation is high as the price of goods and services will increase rapidly, increasing inflation levels.

Usually, it results in depreciation to a currency’s value and is often accompanied by higher interest rates to account for the extra money being brought into the economy.

Balance of Payment (Inflation and Interest rates).

BALANCE OF PAYMENT

The Balance of Payment that will impact currency values is a country’s balance of payments and debt between imports and exports and debt and foreign investments.
If a country is spending more on imports than more money is going out of the economy which often results in a currency depreciating in value.

In addition countries with higher amounts of debt are less likely to obtain foreign capital which means that they will have to inject more money into the economy by raising inflation levels.

Political Stability (Inflation and Interest rates).

Political Stability

The political stability, a country’s political stability largely affects currency prices.

A government with a stable economy is less risky for investors and ultimately a more desirable place to invest funds.

The governments with strong economic and trade policies remove any doubt from the market and ultimately the strength of the currency instability in an economy.

on the other hand will likely see a currency depreciate as the risk of investing funds in that country becomes higher.

Commodity prices (Inflation and Interest rates).

Commodity prices

The final factor that affects currencies is commodity prices, Countries such as Australia that are large exporters of raw materials are affected by movements in commodity prices.

When commodity prices rise countries who export heavily are likely to see their currency rise as they are getting more money in exchange for goods.

The opposite is true of countries who are large importers of commodities such as China higher import costs means the cost of manufacturing becomes higher and profit margins.

We have learned above 5 most important factors that affecting any country’s currency value.

So if you are forex traders or investors than you must understand above leading factors of economy. 

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About Muhammad Shahid

My name is Muhammad Shahid, MBA in Finance from IBA, University of Sindh, Professional Forex Trader & Trainer, I have taught more than 850 Students throughout the Sindh.

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