How Exchange Rates Work

If you’re a businessman looking to move your money across borders or even considering setting up shop in an entirely new country, then your decisions and your business model are going to be heavily influenced by exchange rates. To people new to them, they may seem like a random series of numbers that have little bearing on your money. But they could be the difference between making and losing millions. Here are some of the factors that influence them and that you should be aware of before investing abroad.


Interest Rates


One of the major tools that has a bearing on fluctuations in exchange rates is the interest rate imposed by a nation’s central bank. Interest rates can increase or decrease the value of a currency, and even the suggestion of an interest rate cut or hike can have a big impact. A higher interest rate gives lenders a greater return on their investment relative to other nations, which in turn attracts more foreign capital causing the exchange rate to rise. This boosts economic growth in that when you are buying a currency you are essentially investing in that nation. When an economy grows in strength more people want to invest in it and the currency can strengthen. A currency’s value is also affected by the country’s trade balance, with more exports driving a currency upwards. These economic factors are related of course to geopolitics, as a country’s economic stability has a major bearing on the value of its currency with people wanting to safeguard their money in a stable place.


Keeping Track


There are key measures you can follow to keep track of what is influencing the market. The Consumer Price Index (CPI) is one such indicator and measures inflation month after month. Consumer confidence surveys and retail sales figures will also show you what is going on in the country’s households, while unemployment statistics will give you an indication of the country’s general economic health. Meanwhile a Purchasing Managers Index looks at business conditions by surveying influential purchasing managers in a particular country while manufacturing and service sector production figures will show you how much the economic is making.


Monitoring all these factors and measurements is an ongoing process, which is why it is always helpful to have a foreign exchange broker with you to help guide you through a volatile market if you are heading somewhere new. Alternatively you can use the tools available online to assess the exchange rates situation yourself. That way you can get on with building your business whatever the economic weather.

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