The affect of inflation on rate of exchange

The affect of inflation on rate of exchange.

Before we look at these factors, we should sketch out how exchange rate movements affect nation's trading relationships with other nations. A higher currency makes a country's exports more expensive and imports cheaper in foreign markets. A lower currency makes country's export cheaper and imports more expensive.

Currencies trade on an open market, gust like stocks, bonds, computers, cars and, many other goods and services. A currency's value fluctuates as it supply and demand fluctuates just like anything else.

Ø an increase in supply or a decrease in demand for currency can cause the value of that currency to fall

Ø Decrease in the supply or an increase in demand cause the value of that currency to rise.

A big benefit to forex trading is that you can buy or sell any currency pair, at any time subject to available liquidity. So if u thinks the Euro zone is going to break apart, you can sell the Euro and buy dollars (sell EUR/USD). If you think the price of gold is going to go up, and based on historical correlation patterns, you think the value of gold affects the value of Australian dollar, you might decide to buy the Australians dollars and sell the U.S dollar.

The affect of inflation to the rate of exchanging.

1-differentials in inflation

As a general rule, a country with a consistently lower inflation rate exhibits a rising currency

2- Differentials in interest rates

Interest rates, inflation and exchange rates are all highly correlated .by manipulating interest rates , central banks exert influence over both inflation and exchange  rate, and changing interest rate impact inflation and currency value .higher interest rates offer lenders in an economy a higher return relative to other countries . Therefore, higher interest rates attract foreign capital and cause the exchange rate rise. The impact of higher interest rates is mitigated, how ever the country is higher than in others.