Sending money to a loved one in another country can sometimes be more complex than you would expect. This complexity has a lot to do with exchange rates and their fluctuating nature.
Overview Of Exchange Rates
Exchange rates are the value at which one currency can be swapped for another. These rates keep fluctuating. This is why sometimes the amount of money you send gets there lower than it was at an earlier time. A lot of factors come into play to cause these constant changes. Because of this, you can never accurately predict how the rates will go.
If you need to send money abroad, here are some of the things that can affect your money transfers.
Inflation
Inflation refers to the percentage of rising in the cost of goods and services in a country. If the inflation rate is low, the country has a high purchasing power. In turn, the value of its currency will go high. On the other hand, a high inflation rate causes the currency to depreciate.
Interest Rates
If a country's interest rates are low, the citizens will borrow and spend more. The prices of goods and services may end up being quite high as a result (inflation). In turn, the currency will lose its value. On the other hand, high interest rates will attract foreign investors, thus increasing the local currency's value. However, if the interest rates are too high, the citizens will spend less, which may lead to economic stagnation. A country, therefore, has to maintain a delicate balance here.
Current Account Deficit
A current account is basically how much money a country has. Typically, when a country is importing more goods than it is exporting, there is a deficit in the current account. There will be a need to borrow foreign currency to pay for the imports. This may seem harmless, but there will be excessive circulation of the local currency in the country. Inevitably, the value of the local currency will depreciate.
Public Debt
Governments borrow money to finance major infrastructural projects. This can help boost the local economy. Because of this borrowing, countries are given credit ratings from agencies like Moody's and Standard & Poor's. If the credit rating is good, investors are attracted to the country, thus boosting the currency value. Too much debt, on the other hand, drives away investors. This is because the risk of inflation or defaulting on the loans is too high. In turn, the currency value will go down.
A Country’s Stability
A country can be politically or economically unstable because of war, political turmoil, or even natural calamities like earthquakes. When this happens, investors tend to pull away and take their finances to more stable environments due to fear. Consequently, the value of the local currency goes down while that of the stable areas goes up.
Bottom Line
You may not be able to do anything about the fluctuating exchange rates. However, you’re still better placed if you understand what blows them which way. You may end up saving a bit of money.
