The currency exchange rate is one of the most important factors to determine the countries economic health. Exchange rates play a vital role in a country economic status. That's why exchange rates are mostly watched, analysed and governmentally manipulated economic measures.
1. Differentials in Inflammation
A country with a consistent lower Inflation rate exhibits a rising currency rate. Meanwhile, a country with higher Inflammation typically faces the description in their currency in relation to the currencies of their trading partners.
Note: It's purchasing power increases relative to other currencies.
Add-on: During the last half of the 20th century, the countries with low inflation included Japan, Germany and Switzerland, while the U.S. and Canadaachieved low inflation only later.
2. Differentials in Interest rates
Interest rates, exchange rates and inflammation are deeply connected. By manipulating interest rates, the central bank can influence the Inflation and the exchange rates.
3. Current Account Shortages
The current account is the trade balance between the country and the trading partners, indicating all payments between countries for goods, services, interest and dividends. A shortfall in the current account shows the country is spending more on foreign trade than it is earning, and that it is borrowing capital from foreign sources to make up the debt.
4. Public debt
Countries with large public debts may tend an Inflation and changes in the exchange rates. In the worst case, a government may print their currencies to pay their large debts, but this case will bring a money crisis in their country.
Eg: Zimbabwe Hyperinflation in the late 90's is the best example for this case scenario.
5. Terms of trade
The term of trade is a ratio of comparing Export prices to Import prices.
If the countries export value raises in a greater rate than its Import rate making its currency stronger. Reversely, If the Import value is greater than the Export rate leads to an Inflation .
6. Political Stability & Economic Performance.
Traders inevitably seek out stable countries with strong economic performance in which to invest their capital. A country which has a conflict in its political stand should meet the unstable economic this could lead an Inflation and a drop in exchange rates.
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