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What Factors Affect Currency Valuation?

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  • Written By: Alex Newth
  • Edited By: Angela B.
  • Last Modified Date: 29 October 2016
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Currency valuation, or the value of a country’s currency, is a constantly changing factor. For investors, knowing this value is exceedingly import to get a return. Many factors determine currency valuation, but the most important factors are trade, political stability, banking systems and interest rates, manufacturing rates, and how other countries view the country in question.

In terms of trade, a higher rate of exporting is called a surplus, while a higher rate of importing is called a deficit. When a country exports goods to other countries and those countries purchase the goods, this raises the value of the first country’s currency. Conversely, if the country is importing more goods and, thus, selling more international products than local ones, the country’s currency valuation decreases. The amounts of imports and exports are largely dependent on consumer demand and the price of the goods.

The political situation of a country is a major factor in determining currency valuation. If a country is riddled with instability, bribery and political corruption, its currency value will drop. A country’s debt, along with factors such as war and the popularity of the president, monarch, prime minister or other political leader, also determine a currency’s value. If a country is stable with low debt, no war and an internationally popular leader, the currency will generally be valued higher.

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Banking interest rates, whether they are rising or falling, determine whether investors want to invest in a country’s currency. When an interest rate is high, investors will want to invest to get a larger return. While this is true, the currency valuation and the interest rate tend to move in opposite directions. A high interest rate will soon mean the currency is likely to drop in strength.

The available resources and manufacturing rates are tied directly to currency valuation. If a country has few resources and little manufacturing, then the currency value will drop because that country has fewer products to sell and investors will be less interested in investing. When a country shows strong manufacturing tendencies, it can create more sales, which will strength its currency.

How one country views another determines if the currency will rise or fall. This is tied to some of the other factors, such as manufacturing, trade and the political situation. When one country likes another, the two are more likely to trade. There will also be more tourists going between the two countries, resulting in more internal sales. If one country does not like another, then it will be much less likely to spend money on the other country.

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