Why do exchange rates vary

Key Takeaways Aside from factors such as interest rates and inflation, the currency exchange rate is one of the most important determinants of a country's relative level of economic health. Exchange rates are relative and are expressed as a comparison of the currencies of two countries. Article Sources. Investopedia requires writers to use primary sources to support their work.

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Interest rates, money supply, and financial stability all affect currency exchange rates. Because of these factors, the demand for a country's currency depends on what is happening in that country. First, the interest rate paid by a country's central bank is a big factor.

The higher interest rate makes that currency more valuable. Investors will exchange their currency for the higher-paying one. They then save it in that country's bank to receive the higher interest rate. Second, is the money supply that's created by the country's central bank.

If the government prints too much currency, then there's too much of it chasing too few goods. Currency holders will bid up the prices of goods and services. That creates inflation. If way too much money is printed, it causes hyperinflation. Hyperinflation usually only happens when a country must pay off war debts.

It's the most extreme type of inflation. Some cash holders will invest overseas where there isn't inflation, but they'll find that there isn't as much demand for their currency since there's so much of it. That's why inflation can push the value of a currency down. Third, a country's economic growth and financial stability impact its currency exchange rates. If the country has a strong, growing economy, then investors will buy its goods and services. They'll need more of its currency to do so.

If the financial stability looks bad, they will be less willing to invest in that country. They want to be sure they will get paid back if they hold government bonds in that currency.

If you're traveling overseas to another country that uses a different currency, you must plan for exchange rate values. When the U. If the U. Since the exchange rate varies, you might find the cost of your trip has changed since you started planning it.

You can search online to find the exchange rate of the U. Google has a tool to help with this. It even shows a chart revealing whether the dollar is strengthening or weakening. This is where many different factors can come into play — from government actions to consumer confidence and political upheaval.

Money supply and interest rates are two of the major factors that affect demand for a currency. Both can be controlled by governments and their central banks, which use them as tools to manipulate their economy and their domestic currency. In the UK, the Bank of England sets the official interest rate, known as the Bank of England base rate, which in turn influences the interest rate when you borrow money. The base rate is currently 0.

High money supply is also linked to low interest rates again, because a larger supply means lower demand. Lower interest rates, in turn, also tend to make a currency drop in value — because investors get low returns on investments in that currency. This may make low interest rates seem like bad news.

If inflation the rate at which prices are rising gets too high, because demand for goods exceeds supply, it can cause economic instability and currency depreciation. It can be confusing though. Many would assume that the recent resignation of Sajid Javid as Chancellor would have negatively affected the pound. A key figure and supposed close ally of the Prime Minister would surely show the world that the UK is in yet more chaos and would affect confidence.

However, the pound was given a boost by this, as the expected result is that Boris Johnson will have more control over spending, and the indications is that the budget will show higher spending than previous years. With Universal Partners FX, however, you limit the risk of currency fluctuations massively thanks to our innovative online money platform. Here, you are able to select your chosen currency and lock in an exchange rate that suits you, so you never have to worry about losing out on your money further down the line.

Simply sign-up to a personal or business account to begin and one of our currency specialists can help you the rest of the way. For more information on how Universal Partners FX can help you with your online money transfers, be sure to get in touch with us today. Back Account Login Personal Business. Online platform Sign Up.

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