The political state of a country influences the currency value and exchange rates since a country with higher political turmoil is less likely to attract foreign investors. It puts downward pressure on the domestic currency and decreases its value in exchange rates. It impacts currency value and exchange rates since a country with higher debt is less likely to acquire foreign capital, which, in turn, leads to inflation. Government debt is the amount of debt owed by a federal government. All else being equal, a higher inflation rate in a domestic country will decrease the demand for the domestic currency since the value of the currency depreciates relatively faster over time than other foreign currencies. Inflation RatesĬhanges in inflation rates impact currency value and exchange rates. However, in practice, it is balanced out by inflationary pressures. All else being equal, a higher interest rate in a domestic country will increase the demand for a domestic currency since more foreign investors will seek to invest at the higher interest rate, thereby investing foreign capital into the domestic currency. Interest RatesĬhanges in interest rates impact currency value and exchange rates. Some of the reasons that exchange rates can fluctuate include: 1. Importance of Exchange RatesĮxchange rates capture a lot of economic factors and variables and can fluctuate for various reasons. You could use the EUR/CAD exchange rate and the CAD/USD exchange rate to infer the EUR/USD rate. Cross RatesĬross rates are a method of quoting exchange rates in which various foreign currency exchange rates are used to imply a domestic exchange rate, e.g., if you wanted to determine the EUR/USD exchange rate but can’t access a direct quote. Indirect quotation of exchange rates involves expressing the price of a domestic currency in terms of the number of units of foreign currency that are exchanged. Indirect Quotationĭirect quotation of exchange rates involves quoting the price of a unit of foreign currency directly in terms of the number of units of domestic currency that are exchanged. In addition, the rates can be quoted either directly or indirectly or with the use of cross-rates. dollar (USD)? The exchange rate as of late August 2020 is 1.31, which shows that CAD 1.31 is received if exchanging USD 1.00.Įxchange rates are defined as the price that one nation or economic zone’s currency can be exchanged for another currency. For example – how many Canadian dollars (CAD) can be exchanged for one U.S. It is used to determine the value of various currencies in relation to each other and is important in determining trade and capital flow dynamics.Įxchange rates are quoted between two currencies. An exchange rate is the rate at which one currency can be exchanged for another between nations or economic zones.

International exchange rates