Introduction
Nations all over the world strive to achieve stable economies through legislation of various policies. They do so in the attempt to woe investors to participate in activities that will develop and expand their operations. There is no country in the world that can exist without relying on foreign investors and foreign trading activities (Ilmanen, 2011, 33).
This is due to the disparities in nature and amount of endowments in these countries. Exchange rate is an essential financial aspect that determines the level of a country’s participation in international trade. There are several factors that nations undertake which determine their exchange rates as evident in this essay.
Definition
Exchange rate is the value at which the currency of a country measures against the currencies of other countries. All countries in the word have exchange rates they use to determine the value of goods from other countries (Sarno and Taylor 2003, 11). This rate enables traders to know the value of their goods in the international market.
How States Influence Exchange Rates
Even though, a nation does not have an absolute right of deciding or fixing the rate at which its currency exchanges with those of other countries, there are some extents to which a state can determine these rates. These are steps a nation takes to ensure the exchange rate favours both local and foreign trading activities. Therefore, importation and exportation of goods and services ensures consumers and traders get a fair deal for their money and investments respectively.
Political Stability
Peace is an indispensable factor that promotes trading activities all over the world. Nations that strive to maintain peace within and outside their boundaries enjoy an influx of investors. This means that not only their investments are secure but also their lives are saved. No one will ever wish to invest in a war prone country regardless of the profits the investor will get.
However, countries that encounter civil strife discourage investors (Weither, 2006, 20). Their goods and services do not attract international demand; as a result, their value depreciates. Therefore, the more a government strives to maintain peace within and outside its territories, the higher the chances of enjoying favourable exchange rates.
Growth Potential
Investors are usually looking for countries that offer potentials of economic growth. Nations coming out of prolonged civil conflicts due to poor governance, those that have unexploited resources and those that open their boundaries to foreign trade, attract investors (Jha, 2011, 47). Some African countries are enjoying favourable exchange rates as a result of restructuring their government systems and assuming responsible leadership.
They have demand for modern technology, expertise and investments. This demand makes their currencies fetch high prices in the international market. Therefore, their exchange rates compete effectively with other currencies. The more a country offers investment opportunities to foreign investors, the better its exchange rate ranks.
Balance of Trade
It is not enough for a country to participate in international trade. However, nations should ensure there is a positive relationship between the volume and value of exports and imports (Ilmanen, 2011, 54).
This situation has significant influence on a nation’s exchange rate. The more a country exports, the lower the exchange rate of its currency compared to other nations. Therefore, nations should ensure they export more goods than what they import. This means they participate in productive international trade that raises the value of their currencies.
State’s Debts
Even though, most nations can not survive without relying on international bodies like the World Bank, for financial assistance, it is better for them to borrow as little as possible. The higher the amount of debts a nation has from global organisations or other nations, the higher her currency exchanges with those of other countries.
This leads to an unfavourable exchange rate since the country is not economically independent (Schofield and Bowler, 2011, 96). However, countries with fewer debts have a strong command on international trade activities, and thus their currencies have high values. Therefore, to have favourable exchange rates nations must borrow as little as possible from other nations or international organisations.
Interest Rates
Investors expect high returns on their investments regardless of the risks involved. Foreign investors look for nations that offer high rates on investments in order to cater for operational costs and gain profits. Nations that offer high interest rates on investments have without doubt attracted many investors.
Competitions among investors become inevitable leading to high value for the limited currency of these nations (Clark, 2011, 33). However, countries that offer peanuts to investors discourage them leading to depreciation of the value of their currencies. Therefore, the higher nations offer returns on investments, the more the values of their currencies are appreciated.
Conclusion
Most nations find international trade a one sided activity due to high exchange rates that do not favour them. However, from the above discussion it is clear that such nations can influence the value of their currencies in international markets. Nations should strive to achieve conditions that facilitate foreign and local investments to stand high chances of favourable exchange rates.
References
Clark, I. (2011). Foreign Exchange Option Pricing: A Practitioners Guide (The Wiley Finance Series). New York: Wiley.
Ilmanen, A. (2011). Expected Returns: An Investor’s Guide to Harvesting Market Rewards (The Wiley Finance Series). New York: Wiley.
Jha, S. (2011). Interest Rate Markets: A Practical Approach to Fixed Income (Wiley Trading). New York: Wiley.
Sarno, L. and Taylor, M. P. (2003). The Economics of Exchange Rates. New York: Cambridge University Press.
Schofield, N. and Bowler, T. (2011). Trading the Fixed Income, Inflation and Credit Markets: A Relative Value Guide. New York: Wiley.
Weither, T. (2006). Foreign Exchange: A Practical Guide to the FX Markets (Wiley Finance). New York: Wiley.