It is well known that exchange rates are affected by many different issues. So how are quotations affected by the international economy? What central bank actions affect exchange rate fluctuations? Answers to these and other questions are provided in this article.
How does the international economy affect exchange rates?
International economies affect currency quotations because a currency’s exchange rate reflects the strength of a particular economy. As a result, rising inflation, worsening unemployment, or falling GDP translates into a weakening of a particular currency against other currencies of competing economies. Strong economies therefore have strong currencies, as a result of high demand for them among investors. It is therefore important for a country to have a strong position in the international economy, so that its currency will be stable and strong. This, of course, translates into benefits that accrue not only to the country in question, but also to its citizens.
How does monetary policy affect international economic relations?
Monetary policy is an issue for which the central banks of individual countries are responsible. However, it is worth being aware that it also affects international economic relations. In what way? Well, by shaping the price of money, it is able to encourage investors to invest capital in a country, or make them conduct their business in another country. Monetary policy, by influencing exchange rates, also affects international trade, since the results obtained through the import and export of goods and services depend on it. It is important, therefore, that it is carried out in a prudent manner, as this allows countries to maintain appropriate economic relations with other countries and thus reap a variety of benefits.
What central bank actions affect currency fluctuations?
Exchange rates depend heavily on the actions of central banks, among which are not only the formation of monetary policy, but also the management of foreign exchange reserves. In the case of monetary policy, the most important thing is the proper setting of interest rates, since it is these that affect the value of money. This is because rising interest rates cause the strength of a currency to increase, while lowering them generally causes the currency to weaken due to the loosening of monetary policy. Moreover, the exchange rate is also influenced by the actions of other central banks, an example of which is the recent lowering of interest rates kept unchanged by the FED (the US central bank), which caused the dollar to weaken against the zloty. In addition to this, exchange rate fluctuations are also influenced by the actions of central banks in managing foreign exchange reserves. This is because by buying up or selling off foreign currencies, the central bank influences their current demand or supply.
In conclusion, it should be said that exchange rates depend on many different issues, among which are the actions of central banks. The strength of a given economy is also important, as it is reflected in the exchange rate of a given currency.