Friday, February 25, 2011

The Impact of Interest Rates on Currency Rates

We permission from a very helpful currency portal, we post the following compliments of the following web site:

The Advantages of Currency Trading

People usually carry credit cards or prepaid cards but still there is a dire need to stack up some cash in the wallet. In case the ATM is not working or In case there are some technical problems in accessing the respective card and so on, there are many unplanned things which may jeopardize the comforts and luxuries of your travel .

While exchanging the currency you may be lured by the signs like "Commission free exchange" which in many cases is nothing but a sweetener . You may well be manipulated in ways that may provide you with not so good rate. You can do two things, either you do not go to these agencies or if you go then ensure that you are well aware of the existing value of your currency in the concerned country which can help in negotiating. It is feasible to look for those companies that charge any commission as they may give you a rate that provide best value for the cash .

Many fundamental factors determine the supply and demand for a particular currency and its value against other currencies . Among these factors are interest rates. Central banks are the institutions that set the base rates in a country and change their levels to streamline the development of the local economy. Increasing the interest rate will result will in raising value of the nation’s currency while lowering interest rates should have the opposite effect, respectively .

Financial dictionaries describe currency depreciation as a process when a currency loses its value against another currency or basket of currencies. In such cases, more units of a local currency are needed to purchase the foreign currency i.e. if one British pound was able to purchase two U.S. dollars on a few years ago and now you receive 1.6 U.S. dollars for one British pound, then the pound has depreciated. Depreciation is a process driven by market forces and all fluctuations of currency rates reflect the present market conditions, forming the market value of a particular currency pair .

The currency depreciation can effect positively the overall economic development, though. It boosts competitiveness through lower export costs and secures more income from exported goods in a similar way devaluation does . On the contrary, depreciation makes imports more expensive and discourages purchases of imported goods stimulating demand for domestically manufactured goods. The governments worldwide influence appreciation and depreciation utilising the powerful tool of the base interest rates, which are usually set by the country's central bank and this tool is often used to intentionally depreciate the currency rates to encourage exports .