How do market fluctuations affect Forex rates?
Author : Vandana Rana | Published On : 22 Jul 2021
You will need a Forex exchange to get another country’s currency in exchange for your own. The rate at which the currency exchange takes place is the foreign exchange rate (ForEx rate).
We understand the appreciation or depreciation of the Indian rupee with the fluctuating dollar rate. For example, if 1$ stands at 55 Indian rupees, it means that the rupee is strong. But, on the other hand, as the amount increases, it means that the rupee is weakening.
Did you know that market fluctuations tend to affect the forex rate?
Let’s discuss how some market fluctuations affect Forex rates.
Balance of Payments (BoP)
The market’s current account has its earnings through foreign investment, inclusive of the exports and imports, debts, etc. Therefore, the balance of payments has an inter-relation with the terms of trade of any market. If the country spends more on imports than exports, it will weaken the domestic currency and further affect the forex rates. But you will get better rates when the country has higher exports.
Rate of Inflation:
Inflation refers to a price rise of goods and commodities during a specific time duration. High inflation indicates that there is a steep price increase and vice versa. It helps in determining the purchasing power of the people as a part of the economy. Inflation has a clear effect on the forex rates available with the forex exchange in Delhi. Lower inflation means you will be on the beneficial side as you will be able to do the exchange at a higher rate and get more money in exchange. As a result, the home country’s value will appreciate. Also, if inflation is low, the prices of goods and services will increase at a lower rate.
Interest rate differentiation:
Interest rates have a high correlation with inflation and exchange rates. A high interest rate can attract foreign capital, which will increase the forex rates. But extra factors might reduce the value. So, the relation of interest and forex rates is direct. A dip in the interest rates will decrease the forex exchange rate and value.
Most of the countries tend to indulge in deficit financing to pay for government funding and public projects. These help the domestic market compete on an international scale, but foreign investment is questionable. The bonds will improve quality for sale in open market operations by foreign investors. It is because public debt means a higher inflation rate and depreciation of the prevailing forex rates. The rupee will weaken, and you will get lower amounts in exchange.
Terms of Trade:
Terms of Trade refers to the ratio that helps draw a comparison between the import and export prices. The dominance of export price refers to a favorable situation for the forex rates. When the export pricing is high, it means a rise in the revenue quantum. It also means a developing demand for the home country’s currency and its value. So, the forex rates will improve and appreciate. But, if the imports are high, there is a depreciation of currency value, hence a fall in the forex rates.
A strong economic performance by the market will improve the forex rates. It will enhance the foreign investors’ interest in investing their money. A strong trade policy, availability and judicious use of resources, and high rate of employment reflect a strong and growing market. But, factors like recession will reduce the forex rates. The market might not able to get foreign capital, thus, impacting and lowering the forex rates.
The optimal time to get international money for various purposes is when the market fluctuations affect the forex rates and increase them. By offering these rates, forex exchange in Delhi helps you to get best rates for you during your travel to international destinations.