Real Factors That Determine The Value of Currency ( 1 )

Written by : NGDlover

Don`t you ever wonder how your currency deserve their value in comparison with other currency ? Currencies in the world related to each other like bricks in the structure of the wall. A brick on the bottom of the wall become the foundation for the brick above. A strong hit on the low point of the wall will vibrate the whole brick, while a similar blow at the upper wall only thrilling part locally. So do the currencies, the strong currencies such as US Dollar are take place as a foundation on the bottom of the rest of currencies, they are subject to numerous influences, one hit to them like politics issue to changing weather will influence many other currencies. So, here I will share about what real factors are determining our currency value.

Since the perceptions and attitudes of other countries toward a country are as important as the reality of the country's actual situation (a reality often created by news, media, movies, newspapers, and rumors), in relation with currency's value, the less that is known, usually the lower the value of a currency. Below I have list some factors that really influence every value of strong currencies and the rest, both big impact or small.



Balance of Trade And Investment

1. The balance of trade and investment - Which is similar with financial account, represents the gaps in exports and imports of capital. It is consider as the most important influence on the value of every currencies according to the analysts. The difference between your country`s export and import in terms of goods and services. If exports exceed imports, in either the current account or financial account, it is called a surplus. When imports exceed exports, on the other hand, it is referred to as a deficit.

2. Changing prices on goods - When the prices of foreign goods decrease, The demand of this cheaped goods will increase, thus creating a rise in the prices of foreign goods through natural increased of demand, but then it will help the domestic goods look more attractive and reduce the deficit. It is a circle !

Politics

3. War and Conflicts - The market will always consider about a country's military strength in relation with the value of its currency. Factors like with which other country is a country at war ? and who is it's allies ? how strong their military and its technology, the willingness to go to war and for what, etc.
Domestic conflict such as terrorist attacks, or ongoing conflict will harm the business confidence and economic growth, it will also increase the likelihood of war, and finally rise up the budget deficit.

4. National leadership - More good your national leadership, more strong your currency. Good leadership is just like the good corporate governance but implemented in the government itself. Some factors to mention are the openness, law enforcement, trustworthiness and ability of the leader. The scope of national leadership including president (or such a  similar position) and its cabinet, political leaders, business owners, sports figures, celebrities figures, etc. They all perform the national leadership. As example, the personal health condition of a president or even celebrities scandals like Tiger Wood is very influential in their scope area of leadership.

5. Election - Since national leadership is an important factors, so do the election. Citizens and market perception about their new leader can cause investors to put in or go out from investation on your countries . Also, as new members of Congress are elected, new laws are passed which can affect the economy. Foreign investors may react positively or negatively to these changes, affecting the dollar’s value.

7. Government policies - This factor always have a great impact on the value of its currencies. Issue such as :
>How the ability of the government to service the national debt.
>Changing of laws and openness policy in relation with global finance and trade, or global regulation, or other countries policy.
> Government expansion, it frequently occurs on replacement of the government. A new department or creating new groups can increase government budget or impact to the opportunity cost against other expenses in the budget.
>Ability to keep the policies consistently . This is because unstability will hurt the value of the currency especially with regard to financial policy. If the local or international market believe that your governments policy is on the right track, they’ll put in trust with your curency, and finally will make the currencies up.
>National budget: If the the government is spending more money than it currently has, the government will be in deficit of budget, this situation will force government to make debts that must be paid by next government as well as private sector. A high debt will force the value of a currency lower. But such an anomali of this theory is appear in the US $ currency. As the US is currently considered the world’s most credit-worthy borrower, which is explains why the dollar has remained strong even the US goverment is a big debt owner.
>Tax regulation, this issue is base on fact that every changing in tax policy adn regulation is usually affect the government budget and encourage or discourage people's spending.
>Law enforcement, scandals that involving national leaderships or that occurs in business environtment can burn investors and can fall foreign investment in stocks down.
>Interest Rate - The interest rate is a crucial weapon for Central Banks to control the value of the currency, and the market in overall. If Central Banks consider that their need to take their value of currency up, a potential financial instrument to go is the interest rate.


Other Countries Situation

8. Geopolitical events - Like a  war or conflict or an endemi of disease. Even if your country not involve on that event, your currency will usually get impact. This statement is base on the theory that perception is reality in the currency or forex markets, the value of currency isn’t necessarily about what it’s actually worth, but rather what investors think it’s worth.

9. Changing in foreign reserves - When a large purchaser like China decides to stop adding Dollar to its foreign reserves, all the market was keeping an eye to that event. Though, up till now, most central banks in the world hold more dollars than any other currency as their foreign reserves.

10. Up or down of other currencies - For example, if the Euro is rising up, the investors have another alternative to diversify their dollar.

11. Acceptance of oil / foreign trade for a currency - For example, when several government leader gathers for discussing the use of another currency (Euro) in spite of Dollar as their main currency on foreign/oil trade last year, the demand for Euro increase, and also its value.

12. Booming of foreign country's economic - If other countries’ economies are booming but your country is not, your value of currency will likey to drop and will become a relatively less attractive place to invest.

13. Changing in Interest Rate - A change in interest rate will always influence investor's decision. A higher interest rate mean a higher profit and vice versa. An increasing rate will usually attract investor to put their money in. Although a theory (interest rate parity)explain that currency valuations is in opposite direction of interest rates. Both of them in actual condition have their different situation. The conclusion is investors will always seek for release news about interest rates, to decide what currency to hold or to sell.


Entitlements

14. Demographics - Descriptives of the overall population in a country. A young population are a base of openness and future workforce, thus this may mean a better prospects for the future.

15. Government expenses - Factors such as Social Security, health insurance program, etc, give the market an information about how well the government handles their financial management system. An unstable budget will drive the faith down.

16. Education - A wide range of education meaning such as quality of schools/university and similar to that, scientist, entrepreneurs, inventors, internet know how, culture, religion, and languages spoken are become factors to grade the quality of education in a country.

17. Natural Resources - Country with rich natural resources will create a good perception to the market. Resources such as mining, forest, fish, oil and gas, is on the same line with Education factors, because the natural resources need educated peoples and technology to explore it.

to be continue here..>>

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