If you’ll be exchanging currency, it’s always beneficial to understand what influences the foreign exchange markets. There are factors that play a role in strengthening or weakening a currency.
This article highlights three facts that everyone should know before they do currency exchange. But let’s kickstart this by answering this question:
What is the currency exchange?
The easiest way of defining currency exchange is: it is a process of trading currencies between people, and there are numerous ways of exchanging them that people can use. Currency exchange allows individuals and businesses to make deposits, and do transactions with foreign countries. People can exchange currencies online or over-the-counter too. It doesn’t matter where and how people exchange currency, the currency rate will always be determined by the strength of the economy of their country.
There are a couple of things that determine the strength of a currency. For instance, a strong U.S economy usually attracts more investors than developing economies. As a result, the U.S dollar tends to be stronger than many currencies. Similarly, when a political event forces investors to pull out their investment, the U.S dollar will take a hit. Hence, the currency exchange rate is a crucial determinant of a country’s relative level of economic health. Learn more about currency exchange in Calgary
Here are three fascinating facts that you need to know about currency exchange:
1. Supply and demand drive the value of the currency
When a country exports more goods and services, the demand for its currency increases dramatically. Why? Because everyone who buys from that country will have to convert their currencies to buy goods and services. Yet, there are times when the government has to issue bonds to raise capital. In this instance, foreign investors then purchase in the currency of that country.
2. The inflation rate influences the currency value
In most cases, a country with a lower inflation rate is likely to have a stronger currency. Examples of countries with a relatively low inflation rate include Germany, Canada, the U.S, Japan, and Switzerland, which have stronger currencies than African countries.
3. Political uncertainties can affect a currency
Another factor that can decrease the domestic currency is politics. Political turmoil is enough to make investors withdraw their investments and make a currency take a nosedive. Hence, countries that have political instability tend to have weaker currencies. The same applies to governments of presidents who choose to rig elections to stay in power. Cross-border trade, financial transitions can’t happen without exchanging currencies. There are also many other factors that drive currency learn more about currency exchange in Calgary