An exchange rate measures the cost to buy one currency with another. It is the price of a currency on the global market and is affected by world trade, interest rates, political turmoil and more.
To calculate an exchange rate, simply divide your starting amount by 상품권현금교환 the current price of the foreign currency. Knowing how to read an exchange rate is essential for anyone who travels abroad, works with international clients or invests in foreign currencies.
Inflation
Inflation decreases the value of a dollar over time, which affects everyone from those with savings accounts to debt investors and people on fixed incomes. Inflation also causes businesses to generate more goods and services, which in turn can lead to jobs and higher wages, boosting economic growth.
Moderate inflation is typically considered positive, as it can make saving and investing more worthwhile for individuals. According to Nobel laureate Robert Mundell, an increase in inflation can induce savers to substitute lending for some of their money holdings, which will lower market clearing real interest rates.
A country’s exchange rate can also be impacted by inflation. For example, a depreciation of the currency increases the price of imported goods relative to domestic ones, which can add up to inflation through the “cost push” effect. This can also affect investment flows into a country, which may cause the currency to appreciate. However, this can be offset by higher interest rates on government bonds.
Government Debt
The amount of money owed by the national government to financial institutions is called government debt. It can be an important factor in determining whether governments have the ability to fund infrastructure projects that can improve quality of life for their citizens. In addition, the interest paid on such debt may reduce the amount of taxes collected, putting further pressure on government budgets.
Increasing government debt can be problematic if it is denominated in foreign currency, as this exposes the country to the risk of inflation. In the extreme, the Weimar Republic in 1920 experienced hyperinflation when the central bank printed money to pay off its debts.
Usually, the debt of a country is measured as the stock of its outstanding liabilities in the categories of currency and deposits, debt securities and loans. In the United States, this includes Treasury bills, notes and bonds (including TIPS), and non-marketable Treasury securities held by the Federal Reserve Banks and other entities outside the federal government, as well as intragovernmental debt.
Interest Rates
Interest rates have a significant impact on the economy, including your personal finances. Understanding how they work is key to managing your own finances and making informed financial decisions.
The interest rate is the amount that a lender charges to borrow money, and is expressed as a percentage of the total loan value. It is usually calculated on an annual basis, but can vary by company and individual.
An increase in interest rates leads to the appreciation of a currency, as higher rates attract foreign investment and increases demand for the country’s money. However, this is a complicated process, and the effect of interest rates on exchange rates is not always linear.
For example, if the central bank raises interest rates to combat inflation, this will also decrease the purchasing power of the local currency, and thus may actually lead to a depreciation in the currency’s value. This is due to the fact that high inflation erodes the value of money faster than interest rates can compensate savers.
Political Events
A country’s political climate can have a major impact on a currency’s value. This is because the temperature of politics and economic stances can create uncertainty about a country’s economy and cause investors to lose confidence in a country’s currency.
As a result, countries with political instability typically have lower exchange rates than other countries. In contrast, countries with low inflation and healthy economies usually have higher exchange rates as they are more attractive to international investors.
In short, political events affect a currency’s value because they are an indication of the health and stability of a country’s economy. As such, it’s important for anyone making an international transfer to stay up-to-date on news and events that could potentially affect the rate they are getting. This includes interest rate changes, unemployment numbers and other economic data. NerdWallet writers are subject matter experts who use peer-reviewed studies, government websites and academic research to write helpful articles for our readers.