If you have already exchanged foreign currency before traveling abroad, you know that currency exchange rates tend to go up and down. Have you ever wondered why this is happening?
Here are 8 reasons why currency exchance rates are not always the same.
1. Supply and demand
Supply and demand influences the price of pretty much anything we can buy or sell, and this is also true of currency. This basic economic principle can explain why currency exchange rates fluctuate. If many people want to purchase one type of currency, you can expect the price of that currency to go up.
Inflation is another factor that can influence currency exchange rates. Inflation is not a bad thing in itself, and high inflation means that a country is producing more currency, but that this increase in currency supply does not match the actual growth of the economy. If there is more currency available, it will be worth less.
3. Economic growth
Economic growth is another important factor. A country with a growing economy is not a risky choice for investors, which means that the currency of this country will be more valuable. However, the currency of countries where the economy is not growing much will be worth less.
4. Economic strength
Similarly, a strong economy means that a currency will be more valuable. Investors avoid purchasing currency from countries that have a weak and unstable economy, which makes the economy suffer even more. If you are about to travel to a country with a weak economy, you will benefit from lower currency exchange rates.
5. Policital stability
Currency is issued by governments, and when a government is strong, the currency is more valuable. A country with no political stability and an uncertain future will have weaker currency exchange rates, since there isn’t a very high demand for their currency. The currency of a country torn by war is very affordable, but you probably will think twice about traveling there.
6. Public debt
The public debt of a country’s government is another factor that can impact currency exchange rates. A very important debt can lead to inflation. Why? Because a government can decide to print out more money to pay their debt, and if there is more money, the currency instantly becomes less valuable. For a government, printing money is easy, but it isn’t always a good idea.
7. Unemployment levels
Unemployment levels also affect the economy of a country, which impacts exchange rates. Unemployed people don’t have a lot of money to spend, and people who are afraid of losing their jobs will start saving money in case the worst should happen. When a country tries to boost employment, their currency value often decreases.
8. Interest rates
Finally, the interest rates of central banks can impact currency exchange rates. When a central bank raises its interest rates, currency investors will generally be interested in buying more currency, which means the value of that currency will go up.