3 Factors that Changes the Value of the Currency
Currency is a unit of measurement of the financial market. Though it is a scale to measure assets its value keeps changing. The main factors which can change the value of the currency are the following:
ii. economic growth or economic recession
iii. fluctuations in the global currency market
Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. So inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy. Because of inflation currency loses its strength and hence inflation changes the value of the currency.
ii. Economic growth or economic recession:
Economic growth is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. Economic recession is a period of general economic decline and is typically accompanied by a drop in the stock market, an increase in unemployment, and a decline in the housing market. An economic recession is when growth slows, usually due to a fall-off in consumer demand. The flow of currency depends upon the economic growth or economic recession. Inflation because. of these factor changes the value of the currency.
iii. Fluctuations in the global currency market:
The market in which participants from around the world are able to buy, sell, exchange and speculate on different currencies is called the global currency market. International currency markets are made up of banks, commercial companies, central banks, investment management firms, hedge funds, retail forex brokers, and investors. The mutual relation between the currencies of different countries leads to the change in the value of all other country currencies when one country’s currency gains or losses value.