Short & long-term factors that impact currencies across the world
Short & long-term factors that impact currencies across the world
7.1.13
Inflation: If inflationary expectations in a country are high, the central banker will look to curb it by increasing interest rates, or vice versa. A rise in rates will support the currency, while a fall will cause the demand for the currency to deteriorate.
Commodity imports: The countries that are dependent on commodity imports for domestic consumption usually face headwinds in terms of the currency movement. For India, the increase in gold imports caused the trade deficit to widen sharply, leading to depreciation in the currency.
Political turmoil, geopolitical tensions or natural disasters can also have a negative impact. Currency movement is largely dependent on the day-to-day economic data released across the globe, movement in the global equity markets and a change in commodity prices.
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Long-term factors
Economic growth and inflation: Expectations of economic growth and inflation over a long period affect currency price movement. Consider the US economy, which underwent a long period of slow growth, during which the Dollar Index suffered losses. However, the current expectations of longterm growth are bullish, strengthening the Dollar Index as markets expect a reversal in the state of the economy.
As for inflation, the central bank targets a lower range as a higher inflation rate leads to depreciation in the currency as each unit can buy fewer goods and services. A high rate will restrict central bankers’ steps to change the rate scenario. Hence, inflation expectations drive currency movement.
Stimulus measures: Such steps by central bankers to boost economic growth also impact currency. The quantitative easing program by the Federal Reserve led to a sharp bounceback in market sentiment during the financial crisis and led to the weakening of the Dollar Index. While stimulus measures led to a rise in risk sentiment and weakened the Dollar Index, the ongoing developments on the withdrawal of these steps is strengthening the Dollar Index, indicating the economic recovery in the US.
While these factors provide cues, new developments on the global economic front are equally important in deciding the trend.
economictimes.indiatimes.com
