26 Apr 2023
In basic terms, currency exchange rates are the values at which one currency can be exchanged for another. These are constantly changing, and they’re determined by several factors.
If you regularly spend or send money internationally, currency exchange rates will have an impact on the value of your money.
Knowing what to look for in the market and basing decisions on the available data are essential for investors, traders, and businesses that deal with multiple currencies. In this blog, we will discuss some of the different factors that affect currency exchange rates.
Central banks use interest rates to control inflation and stimulate economic growth. When a central bank raises interest rates, it attracts more foreign investment, which increases demand for the currency and makes it more valuable. On the other hand, when interest rates are lowered, the currency becomes less attractive, and its value decreases.
Inflation is the rate at which the general price level of goods and services in an economy increases. High inflation reduces the value of a currency as it decreases the purchasing power of the currency. Investors are less likely to hold onto a currency that is losing value, and demand for the currency decreases, causing its value to fall.
Political stability is another crucial factor that affects currency exchange rates. Investors are more likely to invest in a country with a stable political environment as it reduces the risk of financial instability. Political uncertainty, such as civil unrest, government changes, or political crises, can negatively affect a currency's value.
Data points such as GDP growth, unemployment rates, and trade balances also play a significant role in determining currency exchange rates. A strong GDP growth rate and low unemployment rates are indicators of a healthy economy, which attracts foreign investors, increases demand for the currency, and makes it more valuable. A trade deficit, where a country imports more than it exports, can lead to a weaker currency, while a trade surplus can strengthen the currency.
Speculation involves traders and investors buying and selling currencies based on their expectations of future events, which can impact currency exchange rates. For example, if traders expect a central bank to raise interest rates, they may buy that currency in anticipation of an increase in value. Speculation can lead to rapid changes in currency exchange rates, as it is based on market sentiment rather than economic fundamentals.
In summary, it is ultimately the combination of different market forces that determine the exchange rate at any one point in time.
Understanding these factors is essential for investors, traders, and businesses that deal with multiple currencies. By closely monitoring these factors, you can make informed decisions about currency trading and investment.
Even if you aren’t getting ready for an upcoming trip abroad, you may want to exchange money into different currencies and hold them in your current account.
Here are three reasons you might choose to do this:
By holding and trading money in different currencies, you can diversify your investment portfolio and reduce your overall risk. If one currency performs poorly, you may have gains in another currency that can offset those losses.
When you trade money in different currencies, you can take advantage of the fluctuations in exchange rates to make a profit. For example, if you buy a currency when it's weak and sell it when it's strong, you can profit from the difference.
If you have an international investment portfolio and regularly make or receive cross-border transfers, you can avoid hidden exchange fees by transacting in the right currency.
Plus, by holding your money in multi-currency accounts, you can quickly capitalise on time-sensitive international investment opportunities. For example, if Nomo’s USD Fixed Term Deposit rates increase, you can open a new deposit account in seconds if you’re already holding USD – plus, we have EUR Fixed Term Deposits coming soon!
With Nomo’s multi-currency accounts, you can instantly make currency exchanges in the app so that you have the currency you need.
This is useful if you:
Are travelling to a different country and want to spend with no international card fees Want to shop online in the local currency at international stores
When making currency exchanges with Nomo, we try to give you a fair exchange rate and Nomo doesn't add a mark-up on the rate provided by our multi-currency supplier.
At Nomo, we think that currency exchange should be fast, affordable and stress-free.
We charge a 1% exchange fee when you make a currency exchange in the Nomo app, and we will make sure all fees are visible before you make the transfer so there are no surprises!
At weekends, when the currency markets are closed, we charge 2% for AED and KWD exchanges. This is because our provider does not support these currencies on the weekends, but we still want to make sure this service is still available to you. The extra fee is to cover any fluctuations in the exchange rate over the weekend.
To start making in multiple currencies with Nomo, head to the app now!