Which are the factors that influence the exchange rates? (Continued)

Exchange rates

There is a big number of factors that determine the exchange rate. Besides the inflation, another essential factor for the formation of the exchange rate level is the economic stability of the country. Here are some other suggestions for eventual influence over the rate of a national currency:

-Government debt

Most countries often take over huge debts in order to finance public sector projects. While such actions stimulate domestic consumption, countries with large deficits are being avoided by foreign investors. The reason is the following – the huge debt fuel inflation. Thus money become depreciated and the pressure on the currency of the country decreases.

-Terms of trade

The ratio comparing export and import prices, known as terms of trade, is bound to the current account and balance of payments. If export prices grow at a higher rate than that one of imports, terms of trade have a positive impact on the exchange rate of the country and vice versa.

-Political stability and economic performance

One of the main demands of foreign investors is political stability, as well as the economic one, in order to invest their capital. Country that meets these criteria, is much more likely to attract foreign investment, competing many others countries.


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