The inflation rate is one of the major factors that affect the foreign exchange rates

The inflation rate is one of the major factors that affect the foreign exchange rates

Question 1
The inflation rate is one of the major factors that affect the foreign exchange rates. A higher
inflation rate translates to a decrease in the currency value of a country as compared to those of
others. In effect, the interest rates peak higher. As for a lower inflation rate, a country’s value of
currency increases leading to an increase in the purchasing power (Bergen, 2016).
Interest rates are another factor contributing to the foreign exchange rates of a country. These
affect both interest rates and exchange rates. Higher interest rates lead to higher exchange rates.
This then leads to an increase in the value of a country’s currency. This attracts a higher return
from lenders. In the same way, lower rates translate to lower exchange rates (compareremit.com,
n.d.). A decrease in the value of a country’s currency occurs.

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