The Influences Over Exchange Rates | Financial World International

Currency exchange rates influence domestic prices on all imported items a consumer can buy. While individuals have little influence over those exchange rates, a solid understanding of the three basic elements that determine foreign currency rates can save buyers significant amounts at cash registers.

Definition

Exchange rates are, in essence, how much of one country?s currency it will take to purchase another country?s currency. Each currency exchange rate is always noted in comparison to another country?s, and that comparison is known as a currency pair.

For example, the United States dollar is scripted as USD. The Australian dollar is noted as AUD. The pairing of the USD against the AUD is written as USD/AUD with a ratio, such as 1:1.23. This ratio means it costs one US dollar to purchase 1.23 Australian dollars. If written in opposite format, AUD/USD 1.23:1, it would cost 1.23 Australian dollar to purchase a single United States dollar.

Relative Value

Each currency pair is different, and one rating against a currency does not automatically influence the original currency?s exchange rate to a third country?s exchange rate. US-to-Japan might be USD/JPY 1.87:1, but Japan to the euro, JPY/EUR, might be 1:1.47.

Influences Over Exchange Rates

There are three primary influences over currency rates, and each factor might have additional sub-categories that have either broad or narrow applications.

The first influence is a country?s political climate. If there is unrest in a country or in a region, expect a change in a country?s currency value. Such things as riots or a high number of demonstrations. The political climate that is calm and optimistic increases a currency relative value against another?s.

The second influence is the national economy. If prices are low, foreign trade is advantageous and unemployment is low, the economic environment promotes low inflation and a high currency value.

The third primary factor in currency rates involves the trading environment or market impression. Foreign exchange trading activity either feeds or starves an exchange rate. The national central banks may determine a daily starting rate for that country?s exchange rate, but the currency traders determine the validity of that price: If the starting rate is not in fair accordance with the impression traders have, the price of that currency will fall: It?s not as valuable in trading as the currency of another country. It will take more of that bad-impressioned country?s money to buy foreign goods or foreign currency.

Because the import costs increase, consumers within that country usually find prices for those items increasing. Sometimes, the price differential is high enough that the importing country releases more currency into circulation to provide money to pay for those imported goods. When a nation?s currency exchange rate is high against the exporting country, expect prices to rise, perhaps prompting a domestic product purchase instead.

Written on behalf of http://www.besteuroexchangerate.com/where you can find the latest rate and useful guidance on currency exchange.

Source: http://www.fwi.org/the-influences-over-exchange-rates/?utm_source=rss&utm_medium=rss&utm_campaign=the-influences-over-exchange-rates

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