How is the rate of exchange of currency determined?
Understanding how currency exchange rates are determined is very important. Especially when one is planning a trip overseas or even sending money across the border. It is these rates that determine just how much one gets when exchanging one currency for another. Rates that will dictate everything from your travel budget to international tuition fees. In this blog, we go into the mechanics of how currency value operates. And how exchange rates are set, using the latest data and insights.
What Decides Currency Value?
The value of one currency depends on a mixture of some influential factors. Economic factors, market demand, and geopolitical events are such influencers. The value of currency basically depends on how much money one's country can buy its equivalent in another country's currency. A few influencing factors are:
1. Economic Stability
The strong, stable economy of a country has a strong currency. Such a strong economy is likely to attract foreign investment. And investment increases demand for the currency and thus value. With a growing economy, the demand for INR might increase. In case India grows, it will strengthen INR's value against other currencies.
2. Interest Rates
Central banks use interest rates to check inflation and stabilize their currency. Foreign Investors are always in search of better returns. Higher interest rates lure foreign investors adding to the demand for the currency. For example, if the Reserve Bank of India were to hike its interest rates, one might witness a stronger INR. The scenario will be caused by the rush of investors into Indian markets.
3. Inflation Rates
Low levels of inflation are typically accompanied by high levels of currency value. Since its purchasing power increases, thereby attracting more investors. High levels of inflation, on the other hand, devalue a currency. As inflation brings down its purchasing power, making the currency less attractive.
4. Political Stability
Countries with a stable government and maintained economic policies are politically stable countries. Such countries are most likely to have a strong currency. Political uncertainty and lack of confidence amongst investors breeds pulls out their investments. Hence, it weakens the currency.
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Who Determines Exchange Rates?
Exchange rates broadly come in two forms: fixed and floating.
1. Fixed Exchange Rates
In certain countries, exchange rates are determined by the government or central bank. This is known as a fixed or pegged exchange rate. A good example is Saudi Arabia, which pegs its currency, the Saudi Riyal, to the US dollar. This rate is held by the government through certain purchases and sales of currencies. Transactions are done in order for the rate to stay in a particular bracket. This method is very often used by smaller economies. The reason being that they can stabilize their currency and avoid market volatility.
2. Floating Exchange Rates
Most of the world's currencies, including the Indian Rupee, are floating exchange rates. These rates are determined by the foreign exchange, or Forex market. The value of a currency in a floating regime is determined by supply and demand. This can change hourly during the day depending on following:
- Economic indicators
- Market speculation
- Geopolitical events
The Role of Forex Traders
In a floating exchange rate system, however, Forex traders have a great deal of involvement in determining the rate. They purchase and sell currency on the global market. Mass action will influence the price of a currency. If they perceive a particular currency is going to increase in value, they would buy it and, therefore, increase demand for it to boost its value. Conversely, if they believe any currency is going to fall, they sell it, lowering demand and hence its value.
Forex markets are extremely dynamic, and the prices fluctuate with every passing second based on real-time data and events.
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How Does This Affect You?
Understanding how the exchange rate is determined helps you in making good decisions. In planning a holiday abroad, or sending money across the border, you can save money. Suppose you were going to Europe and you notice that INR is appreciating against the Euro. Then, it could be a perfect time to exchange your money since you would be able to get more Euros for your Rupees.
Similarly, students going abroad to study can also be informed on the theory of exchange rates. Say, INR becomes strong against the host country's currency, for which you applied to study. Your tuition becomes cheaper, and vice versa. If the INR turns weak, you would most likely want to transfer money immediately to avoid higher costs later on.
Why Supreme Forex?
That means that whenever you go dealing with currency exchange, it's critical that you choose a good provider. Supreme Forex gives competitive rates that enable you to get the most out of your money. Traditional banks also charge higher fees, offering less favorable rates. Supreme Forex real-time rates are as close to the Forex market as possible. So you can be guaranteed you get a good deal on money changes or international money transfers.
Supreme Forex also boasts complete transparency without any additional and/or hidden charges. What you see is what you pay for, so it will be easier for you to plan your finances. Above all of these, at Supreme Forex, there are friendly and time-saving services such as home delivery. Hence, you leave the hassles to us and focus on what truly matters: your travels or your studies
Conclusion
The process of the setting of currency exchange rates goes hand in glove with multiple dynamic factors. Though this might be daunting at first, a basic understanding of how these rates are set can help you make wiser financial decisions. Using a provider like Supreme Forex will make all the difference.
Supreme Forex guarantees the most up-to-date available exchange rate for a quick currency exchange. Your partner in global financial transactions.
