Exchange rate is an aspect that has never been well-understood by millions of people living and running businesses in various parts of the world. Well, this simply refers to the rate at which a country’s currency can be converted to another currency. This acts as the baseline for the determination of the amount of foreign currency you can get as a result of exchanging it with yours; this normally happens when you are travelling abroad. The Forex market, one of the largest in the world today is the sole determinant of these exchange rates.
These exchange rates can vary greatly or marginally in a day. Therefore, before you decide to go for an exchange, you need to know how these rates work and what the current rates are in your local commercial banks.
The factors that affect exchange rates
Many factors can be attributed to the constant difference in rates of currencies across the globe. These include – inflation and economic statuses, among others.
Some of the vital factors which affect exchange rates in various countries today are as discussed below:
a) Levels of inflation. When the levels of inflation are high, the currency value tends to go down and therefore the purchasing power of the citizens is negatively affected. This therefore means that if you are touring such a country, you out to reduce your expenses or else, return home completely broke.
b) High interest rates influence inflation and currency rates. Interest rates charged by banks on the loans that they issue to customers also considerably determine exchange rates for the currency used in a country. This subsequently leads to a rise in the returns that the local banks generate.
c) Economic stability of a country. When a country is economically stable, the people would generally have a high purchasing power and therefore investors would be willing to invest in such places. That translates to better exchange rates and capital gains.
In general, before touring any given country, keenly asses the inflation rates, interests charged by local banks and a country’s economic status as that will help you budget for your trip.