If you’re looking to send or receive money internationally, it’s important to understand the different factors that influence exchange rates as well as the reasons exchange rates change. What influences currency exchange rates, and do exchange rates change on weekends?
Currency exchange rates are defined as the price that one country’s currency can be exchanged for another country’s currency. These rates change daily for a variety of reasons and help to determine the value of a country’s currency, level of trade and capital flow.
There are many reasons behind why exchange rates change and what affects a country’s trading relationship with other countries from around the world.
The rates are mostly impacted by two main factors:
Did you know strong currencies make a nation's exports more expensive and imports from foreign markets cheaper? In countries with weaker currencies, the exports are cheaper, and the imports are more expensive.
Exchange rates change 24 hours a day. Currencies are traded on the market daily, and trade and banking continually take place every single day, even during the night.
This also plays a factor in what determines the demand and supply for foreign exchange as banks buy and sell them around the world.
The Forex market is open 24 hours a day, every day of the week, but it closes on weekends. This is the main reason why exchange rates appear to stay the same over the weekend because the currency market is closed.
Worldwide trading offices, central banks and stock markets close on weekends too.
There are many different factors that can determine what the exchange rate will be for the day.
Some of these factors include:
Interest rates
Did you know that changes in interest rates can influence the currency value and exchange rates? If South African interest rates rise compared to elsewhere, it will become more attractive to deposit money into South Africa. This is since you will receive a better rate of return from saving in South African banks. This will then increase demand for the South African Rand (ZAR) to rise. This is commonly referred to as “hot money flows” and plays a role in determining the value of a currency.
Higher interest rates cause an appreciation and demand for a currency. Lowering interest rates often results in a depreciation of a currency.
A country’s net export and import activities
A country’s net exports or imports also have the ability to impact the overall currency value and exchange rates of a country. If a domestic country exports more goods than it imports from other countries, it will experience a higher demand for its currency. This will cause the domestic country to see its exchange rate increase compared to other foreign currencies.
Balance of trade
Balance of trade refers to the country’s number of imports and exports compared to each other. A positive balance of trade is when a nation’s total number of exports outweighs its total number of imports from other countries.
This means that the country will have a higher intake of foreign currency thanks to its large number of exports and will enjoy economic growth and lower interest rates as a result.
Economic health
The economic health of a country is another reason why exchange rates constantly change.
For example, a country that is experiencing low unemployment rates means its locals have more money to spend, which will help to create a stronger economy. Countries with a strong economy attract foreign investment and this helps to lower inflation rates and increase the strength of the country’s currency exchange rate.
Recession
Due to the poor state of the economy, a country in recession will become high risk and decrease any demand or interest for foreign investment. As the country is less desirable to foreign investors, the country’s national currency will decrease in value as a result.
Speculation
If a country’s national currency is expected to rise for any reason, foreign investors will attempt to purchase more of the currency to make a profit. This can cause immediate demand and will play a role in increasing the domestic currency exchange rate compared to other currencies from around the world.
The political state of a country
Did you know the political state of a country can also influence the overall currency value and exchange rates? A country that is experiencing signs of political turmoil will become less attractive to foreign investors and appear to be at high risk.
Inflation rates
Changes in inflation rates can also impact currency value and exchange rates from all around the world. Countries with lower inflation rates can enjoy a higher appreciation for the value of their currency.
Government debt
The government debt of a country is the amount of debt owed by the federal government. This can affect currency value and exchange rates. A country with higher debt is less likely to attract foreign investment and capital, which results in decreasing its value in exchange rates.
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