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.