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Factors Influencing Exchange Rates

June 26th, 2017

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Say you send $100 to a loved one in a different country every month for six months. You may notice they don’t receive the same amount each month in their native currency. That’s because the exchange rate- the amount of one currency you get in return for another- constantly fluctuates. In this blog post, we explore a few of the factors influencing exchange rates to give you an idea of what to look out for when you’re transferring money overseas.

Interest rates

Most people associate interest rates with how much their money earns in a bank account, but interest rates also affect a country’s currency. Put simply, the higher the rate, the stronger the currency as money floods into a country in search of a higher return. The US is one of the only major economies increasing rates at the moment, so keep an eye on the impact on the US dollar- when you send money from the US, a stronger dollar means the receiver gets more in their native currency.

Geopolitics

Currencies like political stability but aren’t keen on uncertainty. Look no further than the UK for a perfect example. Since the British voted for Brexit, the pound has fallen in value compared to other major currencies, because the consensus is that leaving the European Union will be bad for the UK economy. For now, if you’re sending money abroad from the UK, the receiver gets less in their native currency.

Market conditions

If investors are worried about the state of the financial markets, they tend to put their money into what are generally considered ‘safe havens’. Gold is one, but currencies of the world’s strongest economies are another. The theory is that a strong economy should be able to weather the storm, whether it’s caused by a recession or political instability, so investors feel there’s less risk in moving their money into US dollars or Japanese yen. However, there’s no such thing as a sure bet in the currency markets, so this doesn’t always work out in their favour.

Government intervention

Sometimes, government interference causes fluctuations in the exchange rate. The reason a country might want a weaker currency is because the goods and services it produces are cheaper to countries looking to buy them. For a country relying on exports, a weaker currency can boost the economy. You may have heard in the news recently that US President Trump accused China of manipulating the yuan. The Chinese government denied this was the case, arguing it was actually trying to have the opposite effect on its currency.

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