What Causes Currency Exchange Rates to Change and How It Affects the Travel Industry
As a travel business, you are probably wondering about what causes currency exchange rates to change. At one time, you get more value for your local currency, and on another day, an unfavorable deal for the same amount of your local money.
The truth is that currency exchange rates are very dynamic and can change depending on various factors. The changes can affect your currency exchange transactions either positively or negatively. So, what causes currency exchange rates to change?
This guide explores the factors that cause foreign exchange rates to fluctuate and how the changes can affect the travel industry. Keep reading to learn more!
What Causes Currency Exchange Rates to Change
Currency exchange rates change due to various factors, some of which are related to the trading relationship between two countries.
Here are the major causes of the currency exchange rate fluctuations.
Inflation rates influence a state’s currency value. A low inflation rate usually displays a growing currency value since its buying power upsurges relative to other currencies.
Equally, higher inflation leads to the devaluation of a currency compared to that of a trading partner. High-interest rates commonly accompany this.
There’s a strong correlation between exchange rates, interest rates, and inflation. Most central banks influence the exchange rate and inflation by controlling interest rates. Also, changing interest rates will help control inflation and currency value.
Higher interest rates offer higher returns to lenders. So, the inflow of capital in a country with high-interest rates will increase and increase the exchange rates. In short, higher interest rates cause inflation, while low-interest rates cause depreciation.
The amount of government debt can affect exchange rates in many ways. For example, countries with large public deficits hardly attract foreign investors. Large debts promote inflation, and once inflation is high, the debts get repaid with inexpensive dollars.
Sometimes a country may fail to service its debts via domestic means such as selling of bonds. In such scenarios, the government must upsurge the supply of securities for sale to foreigners, thus dropping the prices.
A large debt may prove worrying to foreigners once they become confident that a country risks failing to pay its debt. If the risk of default is high, foreigners will likely wish not to own securities dominated in that currency.
Export and Import Value
A country’s balance of payment sums up all global trades and monetary dealings made by companies, people, and government bodies. Such transactions include export and imports of goods, capital, and services.
The balance of payment impacts the ratio comparing export prices to import prices. A country’s terms of trade improve once its exports are better than its imports. This raises the demand for the country’s exports, translating to greater demand for the currency.
If export prices rise by a slight rate than that of its imports, the exchange value will drop concerning its transacting partners.
A country’s political state and its economic performance can also affect the strength of a currency. Also, a country with minimum risk for political instability attracts foreign investors. This will raise the value of the domestic currency, attracting foreign capital.
Geopolitical risk is the hazard posed to overseas financiers by unforeseen political changes. If a country’s governmental and economic landscape remains foreseeable, there are high chances of investors purchasing the currency.
What a country has to offer in terms of goods is also important. For example, if goods provided by a government abruptly get more pretty or there is a high demand for them, the exchange rates will rise in line with the growing demand.
How Currency Exchange Rates Affects the Travel Industry
If you are an international traveller or run a travel business, you’re likely to get affected by unstable currency exchange rates. Foreign exchange tends to create various risks that impact global industries, including the travel industry.
Sometimes clients often pay travel agents in their local currency. So, it’s the agent’s responsibility to exchange the money with the travel provider. Any adverse change in the foreign exchange rates will negatively and directly affect them.
Here are some of the currency exchange factors that can affect the travel industry.
Currency Exchange Risks
The currency exchange risks include transaction and structural risks.
Transaction risk happens due to the time difference between signing a travel contract and getting payments. As you wait for the contract to mature, the exchange rate can change significantly, negatively affecting your travel business.
Travel companies face structural risks once their cash entry reacts otherwise to currency rates than their cash outflows. The risk impacts the company’s cash margin with an overall negative cash flow.
Effects from Appreciation
Tourists from overseas have to convert their amounts of cash to that specific country’s currency. They can use the money at eateries, guesthouses, and attraction sites.
For example, once the American dollar upsurges in value compared to other currencies, a U.S. traveller touring the other countries will likely get more value for their money. It is because the converting rate will favor them more once they convert their cash.
As a travel business, you are likely to acquire more business as holidaymakers take advantage of the strong dollar. Sightseers will stop over numerous locations for sand, sea, sun, bathing, and a multitude of other splendid attraction sites.
If the U.S. dollar strengthens and your tourism business includes taking tourists to the U.S, expect the number of tourists booking through your organization to drop. Travellers from other countries will find it very expensive to travel to the United States.
The supply and demand for foreign currencies in the travel industry can affect the exchange rate of one currency versus another. Favourable exchange rates will most likely cause your travel business to blossom. If you are an international traveller, take full advantage of better exchange rates by converting your money at KnightsbridgeFX.