Factors that Influence Exchange Rates and How to Mitigate Exchange Rate Risk

Currency exchange rate boardExchange rates hold very high importance for businesses with international operations. Any fluctuations in exchange rates can cause a major adjustment in the financial position of the foreign subsidiary of a company. It is highly important for such companies to identify the factors that influence exchange rates and to develop a risk mitigation plan.

Factors Influencing Exchange Rates

Following are the factors that influence exchange rates:

Inflation

The prevailing rate of inflation in a country directly influences its exchange rate. If the rate of inflation rises, it depreciates the value of the currency making it weaker against foreign currencies. The rate of inflation is influenced by numerous economic factors such as; economic growth, fiscal policy of the country and the monetary policy of the country. Continue reading