Description
Economic and financial factors can affect the value of a country's currency in both the short-term and the long-term. Write 800-1000 words explaining how the following factors affect a country’s currency both in the short term and long term:
- Macroeconomic
- Sociopolitical
- Fundamental
- Speculative
Each bullet is its own detailed paragraph
Explanation & Answer
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Running head: CURRENCY EXCHANGE RISK MANAGEMENT
Currency Exchange Risk Management
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CURRENCY EXCHANGE RISK MANAGEMENT
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Macroeconomic factors
Macro-economic factors are a key driver of the Forex market. These factors influence
traders’ actions hence the ultimate decision on the value of currency through daily changes of
economic events. Inflation rates are a key determinant of a country’s currency value.
Countries with lower Inflation rates experience currency appreciations as the prices for goods
and services increase at a lower rate. On the other hand, countries with a high inflation rate
experience high interest rates and both factors lead to depreciation in currency value. The
high correlation between interest rates, inflation and exchange rate makes it possible for the
central bank to intervene and manipulate interest rates in order to stabilise the currency. A
country with higher interest rates encourages foreign investors to invest and this leads to
increase in demand of the currency and elevation of its value. Current accounts and balance
of payment also affects currency value (Romer...
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