Introduction
The exchange rate refers to the value of the U.S. dollar against the values of the currencies of other countries. This rate helps determine how much to pay for imported goods and services, and the amount you receive as exports, among other things. When the value drops U.S. dollar, imports become more expensive, and tend to reduce the volume of our imports. At the same time, other countries pay less for some of our products which tend to increase export sales. If imports and exports are an important part of the economy of a country such as Canada, the exchange rate plays an important role in our economy. The exchange rate between the currencies of both countries is especially important if the two countries are heavily involved in trade.
What factors affect the rate of change?
Exchange rate of a country is usually affected by supply and demand for the currency of that country in exchange markets. Normally, this is known as a floating exchange rate. If demand, say dollars, exceeds supply, then the dollar will rise. However, if the supply of dollars exceeds demand, then its value will fall. A huge amount of money is bought and sold in international currency markets for many different currencies.
Several factors influence the supply and demand for the currency of a country.
If interest rates are higher, for example, U.S. in other countries, then investors will choose to invest in the U.S., increasing demand for the dollar, provided that the expected rate of inflation is higher in the U.S. among our trading partners. If interest rates are lower in the U.S. in other countries, investors choose not to invest in the U.S., decreasing demand for the dollar.
If the U.S. inflation rate is higher, investors are less likely to prefer the U.S., even with higher interest rates due to the expectation that the dollar will be eroded by inflation. If our inflation rate is lower, investors are more likely to prefer the U.S. because there will be no hope that the dollar is eroded.
Trade balance also has an effect on the currency of a country. If world prices which increased its exports compared with the cost of imports from that country, the country will gain more by exports than it pays for its imports. The more demand there is for the currency of that country, the better the deal is done. If investors are confident that the U.S. economybe strong, they are more willing to buy U.S. assets, pushing up the dollar. If investors are not so sure that the economy will be strong, be less likely to buy the assets of the country, increasing the dollar down.
The exchange rate refers to the value of the U.S. dollar against the values of the currencies of other countries. This rate helps determine how much to pay for imported goods and services, and the amount you receive as exports, among other things. When the value drops U.S. dollar, imports become more expensive, and tend to reduce the volume of our imports. At the same time, other countries pay less for some of our products which tend to increase export sales. If imports and exports are an important part of the economy of a country such as Canada, the exchange rate plays an important role in our economy. The exchange rate between the currencies of both countries is especially important if the two countries are heavily involved in trade.
What factors affect the rate of change?
Exchange rate of a country is usually affected by supply and demand for the currency of that country in exchange markets. Normally, this is known as a floating exchange rate. If demand, say dollars, exceeds supply, then the dollar will rise. However, if the supply of dollars exceeds demand, then its value will fall. A huge amount of money is bought and sold in international currency markets for many different currencies.
Several factors influence the supply and demand for the currency of a country.
If interest rates are higher, for example, U.S. in other countries, then investors will choose to invest in the U.S., increasing demand for the dollar, provided that the expected rate of inflation is higher in the U.S. among our trading partners. If interest rates are lower in the U.S. in other countries, investors choose not to invest in the U.S., decreasing demand for the dollar.
If the U.S. inflation rate is higher, investors are less likely to prefer the U.S., even with higher interest rates due to the expectation that the dollar will be eroded by inflation. If our inflation rate is lower, investors are more likely to prefer the U.S. because there will be no hope that the dollar is eroded.
Trade balance also has an effect on the currency of a country. If world prices which increased its exports compared with the cost of imports from that country, the country will gain more by exports than it pays for its imports. The more demand there is for the currency of that country, the better the deal is done. If investors are confident that the U.S. economybe strong, they are more willing to buy U.S. assets, pushing up the dollar. If investors are not so sure that the economy will be strong, be less likely to buy the assets of the country, increasing the dollar down.
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