Question

Please discuss how foreign exchange products impact on the values of global assets and liabilities and how interest rates and inflation rates might impact on the value of different currencies. (Minimum 300 words please, no plagiarism please)

Answer 1

- Foreign exchange is the price of one country's currency in terms of another country's currency. Foreign exchange rates are relative and are expressed as the value of one currency compared to another. When selling products internationally, the exchange rate for the two trading countries' currencies is an important factor. Foreign exchange rates, in fact, are one of the most important determinants of a countries relative level of economic health, ranking just after interest rates and inflation. Exchange rates play a vital role in a country's level of trade, which is critical to most every free market economy in the world.

-Interest rates are very important in the forex markets. A country's interest rate is set by the central bank. It is a tool that is used to manage the economy - either by increasing the interest rate to curb inflation or lowering the interest rate to promote growth.

Each country's central bank lends money to some banks. The basic interest rate determines the amount of money that these banks must pay to borrow money. Banks also lend money to other banks and consumers in the form of loans in exchange for an interest payment.

a higher interest rate is the sign of a strong economy and investors are more likely to invest in an economy that is growing. The demand for the local currency is likely to increase, and this usually leads to an increase in its value.

- Inflation measures how fast the prices of goods and services increase over a given period of time. An increase in inflation means that prices are quickly rising. If the inflation rate decreases, the prices of goods and services are still increasing, but at a slower pace.

If the inflation rate rises, household purchasing power is reduced and this can have a negative effect on the country's economy and currency.

However, if a country is experiencing deflation, which means that prices are actually falling, investors may also consider that the economy is in poor shape. Therefore, it can also have a negative effect on the value of the currency.

If the inflation rate moves within the range defined by the central bank, the value of the currency won't move much. The value of the currency will react much more if the inflation rate is significantly outside of this range.