For all the Knowledge we acquire in School, not a single time the Educational Curriculum covers financial Education. For all you know we receive a lot of knowledge in School but even business courses limit the content they feed the student on financial education. It always comes in a form of designed to pass to student on what they should know. Few people get lucky to get their hands on miscellaneous in addition to their what they are suppose to know but regardless , that is just to say we don’t really get enough education on particularly financial education.
Today am going to run you through factors that makes currencies (fiat or paper money) rises and fall in value. Am sure people have come across news and charts comparing different states currencies like the US dollar to other state currencies and how economies get affected when their currencies loses its purchasing power.
The value and exchange rate of a currency can fluctuate dramatically for better or worse and provide a window into the country’s economic stability. Below are the factors and events though are likely to prompt a change in a currency value;
INFLATION AND INTEREST RATES.
Inflation refers to the rate at which the general price of goods and services are growing or dropping. The purchasing power of a particular state currency is determine by its inflation and therefore small inflation rate indicates a healthy, stable economy , whereas large increase could cause economic instability that significantly devalues the currency.
If inflation rates are very high, the central bank of a state could try to counteract by increasing the interest rate, which encourages savings and over spending. This also likely to stimulate foreign investment and bring more capital into the economy, thus increasing demand for that particular state currency and boosting the currency strength to stabilize the particular state economy.
BALANCE OF PAYMENTS.
A balanced sheet of a country refers to its income and expenditure from foreign transaction like imports and exports. How balanced a country payments are affects the exchange rate of a country. Let’s say a country spends more of its state currency on paying for imported goods and receives less income on things they export. This will create more supply of that particular state currency while there is not enough demand because less stuffs are exported this will cause that particular state currency to depreciate. On the contrary if exports exceed imports the current account surplus will lead to an increase in the currency’s value.
Every state currency rise in value base on demand , and the reason why the US dollar is so powerful is because it Is used in all across the globe for transactions though fiat currencies loses its value with time but compared to the once that have a lot of demand it always beats it competitors because of dominance.
And for that a country with a large amount of government public debt owned by the state government is likely to acquire less foreign capital and demand for that state currency will depreciate which will eventually lead to inflation causing the currency to lose its purchasing power.
If a government debt is forecast to be huge, foreign investors will sell their bonds in the open market which will result in a decrease in the exchange rate for that particular state.
TERMS OF TRADE
Actually every country have their terms of trade with other countrie’s , which refers to the ratio of export prices. If the former grows at a quicker rate than the latter, a country’s terms of trade will improve, thus drawing in more revenue.
This increase in revenue will raise the demand for the country’s currency and increase its value, which drives exchange rate against other pairs. And likewise the opposite will happen if imports prices rise at a quicker rate than the export prices.
The terms of trade are closely linked to the country’s balance of payments , in that both inextricably linked with a country’s export and imports which as a way whether causes demand or more supply to that particular state currency resulting in whether a rise in value or a depreciation.
POLITICAL AND ECONOMIC SITUATIONS.
A lot of factors affect state currencies positively or negatively, accounting for factors such as, GDP (Gross Domestic Product), unemployment rate, housing statistics and trade balance can strongly affects a country’s economy as in its buoyancy.
A country’s political and economic climate can have a bearing on the value of its state currency. Generally, if a government is stable, and the economy is sound, that country’s currency will have high demand, leading to higher exchange rates. If positive factors are strong with regards to the country’s income growing and the country’s expenditure is not exceeding its income, if these are strong the currency will likely appreciate.
By contrast, if an economy is experiencing political upheaval or an economic downturn, its currency becomes less attractive to investors and demand will duly fall. For example Brexit uncertainties made the value of the British pound fell sharply on occasions during 2018 because of the deal.
Just like a lot of analyst and economists speculate on the daily market about how currencies are going to rise and fall. Truly some of these sentiments can drive the values of state currencies. If the sentiment of a particular state currency is projected to rise, the investors will increase their demand for it so that they can make profit in the coming months.
This increase in demand will result in an increase in value of the currency, which in turn will prompt its exchange rate to rise.
In some cases, a country’s government might act to manually address the inflation or deflation rate of its currency
If a currency’s value is quite distant from a country’s economic aims, becoming excessively weak or strong from free market trading, the government may step in to artificially redress the supply and demand to be balanced.
For example, a weakened currency could have an excessive supply , prompting the government to make it more expensive by raising interest rates, in turn making the currency harder to borrow. Conversely a strengthened currency could be reversed by the government flooding the market with more of the currency.
Apparently the total supply of every state currency is unlimited and in a situation where the states central banks can step in and redress situations, many central banks control demand by increasing or lowering the supply of money in use, thus lowering or increasing the amount of money in circulation.
An increased money supply reduces the price on interest of borrowing the currency, which makes people and businesses more likely to borrow it because of lower interest rate on the borrowed currency. When these increased borrowings get spent, the economy will most likely grow. However, if the money supply grows at a quicker rate than the supply of goods and services , prices could inflate causing the currency to lose its purchasing power.