Determinants of Exchange Rate
- 6월 29, 2017
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Determinants of Exchange Rate
Many factors determine the exchange rate, everything related to trade relations between the two countries.
As with many aspects of economics, the relative importance of these factors is controversial.
1. Difference in Inflation
Generally speaking, countries with a steady inflation rate will increase their currency value by increasing their purchasing power against other currencies. Countries with high inflation typically see depreciation at the relative exchange rates of the counterparty currencies. This is usually accompanied by higher interest rates.
2. Interest rate difference
A high interest rate gives lenders a higher return than other countries. So high interest rates attract foreign capital and increase exchange rates. However, if the inflation of a country is much higher than the inflation of other countries, or if the additional factor plays a role in driving the currency, the effect of the higher interest rate is eased. Lower interest rates tend to reduce exchange rates.
3. Current Account Deficit
It requires more foreign currency than the foreign currency obtained through export sales, and it supplies more of its own currency than foreigner's product demand. If the demand for foreign currency is excessive, domestic goods and services are cheap enough for foreigners and foreign assets are too expensive.
4. Public Debt
Governments can print money to pay for a portion of a large debt, but inflation will inevitably increase if the money supply is increased. Also, if the government can not cover the deficit by selling domestic bonds, it is necessary to increase the supply of foreign securities and lower the prices.
5. Terms of Trade
Trading conditions, which is the ratio of the export price to the import price, relate to current account balances.
If the export price of a country is higher than the import, the terms of trade will improve. The increase in terms of trade shows that demand for national exports is increasing.
As with many aspects of economics, the relative importance of these factors is controversial.
1. Difference in Inflation
Generally speaking, countries with a steady inflation rate will increase their currency value by increasing their purchasing power against other currencies. Countries with high inflation typically see depreciation at the relative exchange rates of the counterparty currencies. This is usually accompanied by higher interest rates.
2. Interest rate difference
A high interest rate gives lenders a higher return than other countries. So high interest rates attract foreign capital and increase exchange rates. However, if the inflation of a country is much higher than the inflation of other countries, or if the additional factor plays a role in driving the currency, the effect of the higher interest rate is eased. Lower interest rates tend to reduce exchange rates.
3. Current Account Deficit
It requires more foreign currency than the foreign currency obtained through export sales, and it supplies more of its own currency than foreigner's product demand. If the demand for foreign currency is excessive, domestic goods and services are cheap enough for foreigners and foreign assets are too expensive.
4. Public Debt
Governments can print money to pay for a portion of a large debt, but inflation will inevitably increase if the money supply is increased. Also, if the government can not cover the deficit by selling domestic bonds, it is necessary to increase the supply of foreign securities and lower the prices.
5. Terms of Trade
Trading conditions, which is the ratio of the export price to the import price, relate to current account balances.
If the export price of a country is higher than the import, the terms of trade will improve. The increase in terms of trade shows that demand for national exports is increasing.
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