Friday, 17 February 2012

UK Currency Exchange Gets Affected by Many Macroeconomic Factors of the Country

One of the factors that affect Forex Update is the rate of inflation. The reason why inflation rate plays a great role in determining currency value is because the ratio of currency in purchasing power parity is the foundation of the exchange rate that reflects the law of value. The inflation rate of any country is inversely proportional to the value of national currency. That is if inflation rate increases, value of national currency decreases. That is how inflationary depreciation of the currency in a country lowers the purchasing power and currency exchange rate against currencies of countries where the inflation rate is lower.

Currency exchange services also need to keep in mind the factor of balance of payments as it directly affects the value of currency exchange London. The active balance of payments promotes the national currency as the demand from foreign debtors increases. The passive balance of payments leads to the possibility of a decrease in the national currency's exchange rate as domestic debtors try to sell everything using a foreign currency to repay their external obligations. However, the effect of balance of payments on the exchange rate is always dependent upon the openness of the economy. In an economy in which share of exports in gross national product is higher, exchange rate is going to be more flexible.

Financial services company also knows that components of balance of payments also get affected as the exchange rate has definite impact on economic policy of the state. Those components include current account and capital account. The effect of changes in tariffs, import restrictions, trade quotas, export subsidies also impact trade balance. When there is a positive balance, the demand for the national currency increases and when it is negative, it decreases. Also, the level of domestic interest rates, restrictions and import and export of capital affect the movement of short-term and long-term capital.

Currency exchange services should inform their clients that negative influence of excessive short-term capital inflows into the country on its currency rate can increase the excess money supply, which, in turn, may lead to higher prices and the depreciation of the currency.

UK currency exchange rate is also affected by the difference in interest rates in different countries. There are two major factors involved in this. First, when there are changes in national interest rates, short-term international capital flows get affected. When national interest rates get increased, inflow of foreign capital too gets increased. Second factor is, interest rates affect the operation of foreign exchange markets and money markets. When any transaction has to be made, the difference in interest rates on national and global capital markets is taken into consideration so that maximum profit is derived. The banks often prefer to obtain cheaper loans in foreign money markets where rates are lower and put foreign currency on the domestic credit market, if its interest rates are higher.

However, when the interest rates increase, demand for domestic currency reduces because it becomes very expensive for business to get credits. For example, in order to take out a loan, an entrepreneur increases the cost of his product which consequently increases the prices of goods in the country. This then devalues the national currency against a foreign currency.

Wednesday, 18 January 2012

UK Currency Exchange Rates are Affected by Many Market Forces including Demand & Supply

Currency exchange services providers facilitate traders or investors to exchange the currency of their own country into the currency of another country for various reasons. Forex News or for matter any exchange rate is calculated on a daily basis based on the results of foreign currency trading activity for the day.       

There are two different ways through which foreign exchange rates are calculated. They are direct and indirect. A direct rate is also called a multiplier in which a value of a stipulated currency is multiplied by the target currency or the quote currency to determine the value of the base currency. For instance, if there is a need to exchange British pound for US dollars, one needs to get the direct exchange rate from a bank or financial services company that provides global foreign exchange services as well. This rate needs to be multiplied by the amount required in U.S. dollars. Now, the figure that comes after this multiplication is the currency exchange London. The method to read direct exchange rate table is from left to right.

An indirect method to calculate currency exchange rate is called a divider. The online currency exchange rate is provided daily, is based on one specific currency, and all values are based on the valuation of a third currency. Therefore, the rate must be divided by the daily rate for the third currency to obtain the actual amount required in the home currency to purchase the secondary currency. Meanwhile, the rate which is used by traders for purchases and traveling is called the market rate. Market rate is always based on the trading completed the previous day. Market rate is typically a rate at which the currency was selling the previous day at the close of trading.

Since exchange rate deals with the global financial market, there are various market forces including demand and supply that affect these rates. One such factor is inflation rates. If UK has comparatively lower inflation rates than the other countries, UK exports will be more competitive and British Pound will be in great demand to buy UK goods. Thus, it is obvious that the countries which has lesser inflation rates are going to witness increase in the value of their respective currencies.     

Higher interest rates also contribute in currency's increased value. If UK has higher interest rates than anywhere else in the world, investors are going to be interested in depositing money with UK's financial institutions. Such higher interest rates would help Sterling rise in the foreign exchange market. This is typically known as hot money flows and though a short run factor is of great importance in determining the value of a currency.   

Speculation is yet another factor that can turn the logic of the market upside down. For example, if the speculators in the market speculate that the sterling is going to rise in near future, the demand of British Pound will increase to make a profit. Going by the law of supply and demand, the increased demand will result in increased value as well.    

Similar to lower inflation rate, there is a factor of attractive and competitive rates of goods. If British goods become attractive and competitive for buyers, the demand for British Pound will automatically increase.