Economic Factors That Affect Your Currency

1. Balance of Payments.

Simply put, balance of payments refers to the difference in value between the exports and imports of a country. This is one of the most important methods used to determine the international monetary value of a currency for a specific period. It is computed on a quarterly basis each year.

A country is said to have a deficit balance of payment if the value of its imports is greater than that of its exports. Inversely, it has a surplus balance of payment if the value of its exports is greater than that of its imports. When there is a deficit, the value of a currency tends to fall; and when there is a surplus it tends to rise. This happens because when goods are sold out of a country, the selling country requires payment in its own currency. The country making the purchase has to convert money to the seller’s currency thus increasing the value of that specific currency.

2. Government debt.

If you’re planning to use an online currency conversion company to change your money you might be surprised to learn that the level of government debt of the country you plan to visit is affecting the amount of money you’ll receive when you convert your cash to their currency. If the country has a large scale deficit the country becomes less attractive to investors since the debt encourages inflation. On the other hand, if the debt is lower it sends a message to investors that the country is largely self-reliant and this in turn leads to more investment projects in the country that ultimately boost the value of the native currency.

3. Speculations

If a country’s economic climate is expected change due to one reason or another the value of its currency is sure to change as well. The same applies to its economic performance. The reason is negative speculations deter investors. Fewer investors will choose to invest in the country thus causing the value of the currency to fall. If, on the other hand, there are positive speculations more investors are likely to be attracted which will in turn cause the value of the currency to shoot.

4. Terms of trade

Terms of trade is a term that falls under the same umbrella as balance of payments. Both refer to exports and imports. Under terms of trade, focus is on the ratio of the import and export prices. For a country’s currency to rise its terms of trade need to be high. Basically, this means the price of exports needs to be rising at a greater rate than the prices of imports. This will result in greater revenues for a country which will ultimately result in the country’s currency to rise. The rise in the currency, similar to balance of payment, is caused by an increase in demand of the country’s currency.

5. Interest rates

The central bank of a country can determine whether the value of its currency will rise or fall by how it chooses to manipulate the interest rate. For instance, if it chooses to raise the interest rates it is likely that a country’s currency will appreciate. This works to the benefit of investors who lend money to local entrepreneurs. In the long term, the high rates guarantee the investors higher return for money lent. This leads to more capital injection in a country’s economy while simultaneously increasing the demand of its currency thus causing its value to go up.