Factors influencing the exchange rate Flashcards
Inflation
Low inflation = exports more competitive, imports less competitive = increase demand for domestic currency = appreciation in currency
Interest rates
Higher interest rates cause an appreciation. Cutting interest rates tends to cause a depreciation Higher interest rates = more attractive to deposit money in that country = demand for currency rises = appreciation
Speculation
If speculators believe the sterling will rise in the future, they will demand more now to be able to make a profit. This increase in demand will cause the value to rise. Speculation = demand increases = appreciation
Change in competitiveness
More competitive = more demand = exchange rate to rise
Diagram
Exchange rate, supply and demand of the pound