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By Nipapun Poonsateansup, CFP® Dependent Financial Planner
If anyone has followed the economic news on a regular basis, would have heard. 'Thai baht strengthens' or high interest rates foreign investment weakens'. Have you ever wondered what it means by baht is weak or strong, why it matters for us and how will it affect our investment? Find the answers in this article.
First, get to know the word “foreign exchange rate.”
Foreign Exchange Rate is the price of one currency relative to another currency. The main components of the exchange rate are two parts: local currency and foreign currency. The price can be displayed in two ways.
First, the foreign currency is displayed in local currency and the second type is the local currency expressed in foreign currency. For example, US $ 1 is 33 baht. In return, US $ 1 is US $
Factors that affect the exchange rate are interest rates, economic growth, and currency trading needs. This can be explained as follows.
- Interest rate: High-interest rates will pull in the money flowing into the country. By nature, money flows from low-yielding to high-yielding. Where are the high returns? High interest rates foreign investment term money will flow to that. As a result, currencies with high-interest rates appreciated. If money flows in, the value of money will be quite strong.
- Economic growth: this factor will reflect that country with stronger economy or have a better growth rate, the central bank is likely to raise interest rates to help curb the expansion of inflation. And from the above-mentioned factors that Higher interest rates will attract more foreign investment and the demand for money is quite high will it makes the value of money more as well.
- Currency Trading Needs: It affects the exchange rate, high interest rates foreign investment. The money flowed from the trade, export and from foreign tourists arriving in the country. How does the flow of money into this country affect the baht? High interest rates foreign investment answer is that transactions in Thailand require a baht so foreign currency flows are exchanged into Thai Baht. When the need to buy (the baht) from exporters or tourists. The baht will be stronger or more expensive.
Exchange rates have both positive and negative impacts on the Thai economy. This may result in the country losing its competitive price (because the baht is more expensive) or the export value converted into Baht decreased, continuing to the wages of workers in export-related businesses. It may slow down economic growth. For example, the export business has a profit from the sale at $ 1 million, if the exchange rate is 33 baht per US dollar, the business will be back in the country at 33 million. If the baht appreciates to 30 baht per US dollar (the baht is stronger, the less money is spent on foreign currency exchange), the business will be left with only 30 million baht back in the country. Export and travel businesses will prefer week money over string money.
However, on the contrary. A stronger exchange rate will help reduce the cost of imported raw materials and it also helps slow down the cost of living, especially in the period when energy price in the world market grows rapidly. For instance, the business needs to import goods from abroad and assume that the cost of goods is $ 1 million. If the exchange rate is 30 baht per US dollar, businesses must pay the cost of importing goods at 30 million baht. However, if the baht is depreciated to 33 baht per US dollar, the business will have to pay the cost of goods up to 33 million baht. Business must pay 3 million more. Therefore, for businesses that import goods from abroad, they prefer a stronger baht than week baht.
Exchange rates are what the export/import business operators face.
By changing the exchange rate, the income or expenses in the Thai Baht will be uncertain and this may cause additional profit or loss. However, the volatility of the exchange rate is hard to predict because there are many factors that affect the movement of exchange rates like, the economic fundamentals in the country, monetary and fiscal policy, the world economy, forecasting and speculation, political instability in the country and abroad, market psychology and rumors.
Although the business cannot control the exchange rate fluctuations, it can manage the exchange rate risk using the appropriate tools for hedging, such as foreign currency forward contracts. To be able high interest rates foreign investment manage revenue and costs more efficiently.
In summary, monetary or exchange rate is one factor that affects the rate of return on trade and investment. Understanding the exchange rate and tracks the changing situation, find out more information or expert advice, will help businesses related to international trade, the business sector expanded to foreign countries and including the people who invested in securities or foreign assets can adjust to maintain the return on investment and can prevent or reduce the risk of exchange rate.
How National Interest Rates Affect Currency Values and Exchange Rates
All other factors being equal, higher interest rates in a country increase the value of that country's currency relative to nations offering lower interest rates. However, such simple straight-line calculations rarely exist in foreign exchange.
Although interest rates can be a major factor influencing currency value and exchange rates, the final determination of a currency's exchange rate with other currencies is the result of a number of interrelated elements that reflect the overall financial condition of a country with respect to other nations.
Key Takeaways
- Higher interest rates in a country can increase the value of that country's currency relative to nations offering lower interest rates.
- Political and economic stability and the demand for a country's goods and services are also prime factors in currency valuation.
- Inflation can lead central banks to set higher interest rates to help cool down a hot economy.
Factors in Currency Values
Generally, higher interest rates increase the value of a country's currency. Higher high interest rates foreign investment rates tend to attract foreign investment, increasing the demand for and value of the home country's currency.
Conversely, lower interest rates tend to high interest rates foreign investment unattractive for foreign investment and decrease the currency's relative value.
This simple occurrence is complicated by a host of other factors that impact currency value and exchange rates. One of the primary complicating factors is the relationship that exists between higher interest rates and inflation. Central banks often raise interest rates in response to rising inflation in an attempt to cool off an overheating economy. But, if inflation rises too quickly, it can devalue a nation's money quicker than interest rates can compensate savers.
Interest rates alone do not determine the value of a currency. Two other factors—political and economic stability and the demand for a country's goods and services—are often of greater importance. Factors such as a country's balance of trade between imports and exports can be a crucial factor in determining currency value. That is because greater demand for a country's products means greater demand for the country's currency as well.
Favorable numbers, such as the gross domestic product (GDP) and balance of trade are also key figures that analysts and investors consider in assessing high interest rates foreign investment given currency.
Another important factor is a country's level of debt. High levels of debt, while manageable for shorter time periods, eventually lead to higher inflation rates and may ultimately trigger an official devaluation of a country's currency.
Politics, Economics, and Currency Valuation
The recent history of the High interest rates foreign investment. clearly illustrates the critical importance of a country's overall perceived political and economic stability in relation to its currency valuations. As the U.S. government and consumer debt rise, the Federal Reserve moves to maintain interest rates near zero in an attempt to stimulate the U.S. economy. When the economy recovers and grows, the Fed responds by incrementally raising interest rates.
Even with historically low-interest rates, the U.S. dollar still enjoys favorable exchange rates in relation to the currencies of most other nations. This is partially due to the fact that the U.S. retains, at least to some extent, the position of being the reserve currency for much of the world.
Also, the U.S. dollar is still perceived as a safe haven in an economically uncertain world. This factor—even more so than interest rates, inflation, or other considerations—has proven to be significant for maintaining the relative value of the U.S. dollar.
A country’s level of economic health is a strong influence on foreign exchange rates. Consider the current exchange rate as a snapshot of a country’s economic stability. If an exchange rate is strong, this is an indication of economic and/or political strength, if an exchange rate is weak, this is an indication of poor economic and/or political stability. Such rates may fluctuate daily with the changing market.
It’s important to understand what determines exchange rates, particularly for companies thinking of sending or receiving money from overseas. Keeping an eye on currency exchange rates can provide a greater understanding of foreign exchange rate variances.
Here we examine some of the key factors that influence the fluctuations in exchange rates and explain the reasons behind their volatility:
1. Political Stability &#; Economic Performance
As mentioned above, a country with lesser danger of political turmoil is a far more attractive option to foreign investors, therefore drawing investment away from nations with less political and economic stability. Such increase in foreign capital, often leads to an escalation in the worth of its domestic currency. While a country prone to poor economic performance and/or political confusions may see a decline in exchange rates.
2. Inflation Rates &#; Interest Rates
Interest, inflation and foreign exchange rates are all connected, and impact on one another.
- Interest Rates
Higher interest rates cause a country&#;s currency to rise, attracting more foreign capital, and creating an high interest rates foreign investment in exchange rates. Stronger interest rates attract foreign investment, further heightening the demand for a country&#;s currency. - Inflation Rates
Changes in market inflation also cause changes in currency exchange rates. For example, a country with a lower inflation rate than another&#;s will see an appreciation in the value of its currency. And where the inflation is low, the prices of goods and services increase at a slower rate. A country with a lower inflation rate on a consistent basis will display a rising currency value, while a country with higher inflation will see depreciation in its currency and is often accompanied by higher interest rates.
3. Public Debt
Government debt, also known as public debt, is debt owned by the government. A nation with significant government debt is far less likely bitcoin investment uk young obtain foreign capital, resulting in inflation. If the market forecasts spiraling government debt within a certain country, foreign investors will likely sell their bonds in the open market. As a result, the value of the country’s exchange rate will decrease.
4. Country’s Current Account
The current account of a country replicates balance of trade and earnings on foreign investment, gauging all economic transactions between that nation’s people and the people of all other nations. It consists of exports, imports, debt, etc. As goods and services flow from one country to another, the high interest rates foreign investment rates of those countries’ currencies tend to fluctuate to promote balanced trade between the two nations.
5. Guesswork &#; Speculation
Should a country&#;s currency value be predicted high interest rates foreign investment rise, investors will request more of that currency in a bid to make a profit in the near future. Consequently, the value of the currency will increase due to the rise in demand, which causes a rise in the exchange rate.
Need More Information on Transferring Money Abroad?
Each of the five key factors listed above help to determine the variations in foreign exchange rate. For companies who send or receive money on a regular basis, being up-to-date on such influences will help to better evaluate the best time for international money transfer.
Businesses can prevent potential falls in currency exchange rates by selecting a locked-in exchange rate service. This will guarantee currency is exchanged at the same rate irrespective of any unfavourable fluctuation due to the aforementioned factors.
Specialising in the realms of international currency means FX specialists have the expertise and power to eliminate inflated exchange rates for a business, making international payments up to eight times cheaper than the banks. Tools such as spot contracts, market orders, forward contracts and hedging solutions are often used by an FX specialist to provide competitive exchange rates.
If you’re looking to keep unfavourable fluctuation under control with a fixed rate, contact Central FX, where our friendly FX specialists can help.
Why do Higher Interest Rates attract Foreign Investors?
Suppose two countries. Let's call them A and B.
Suppose, high interest rates foreign investment simplicity, that the exchange rate between these two countries is 1. Further, suppose both countries have the same inflation rate and same nominal interest rate (and thus the same real interest rate).
Now, suppose that country A, for whatever reason, triggers a contractionary monetary policy. The central bank of country A enacts this policy by selling securities in the open market. These securities sells cause a sharp increase in supply of securities. Given a relatively inelastic demand, this forces securities prices downs and yields up. That is to say - this action causes interest rates to rise. A rising interest rate is considered contractionary because it slows investment.
So now we have two countries, A and B, with a exchange rate but now country A has a higher real interest rate than does country B. Assume it cost nothing for people in country B to invest in securities in country A.
We can reasonably expect people in country B, facing a fixed exchange rate and no cost of moving capital, to buy Country A securities. Why? Because the securities in country A are more profitable because they offer a higher yield. That is to say - they are more profitable because of the higher prevailing interest rate in country A.
So, contractionary policy in country A raised interest rates (to slow investment). This interest rate hike made securities in country A more profitable than they were before the interest rate hike. This increase in the profitability in the securities of country A induced investments from people in Country B.
Hopefully that helps.
Abstract
Interest rates are critical determinants of foreign direct investment. Traditionally, investors will shop for low cost credit sources or lower interest rates and invest it in economies that are promising higher returns. The economic theory which expounds on how capital moves a worldwide economy insist on the fact that capital tends to flow to states which have a return on investment that is higher as compared to countries with higher interest rates. Consequently, investment is high in states that offer better investment returns as well as security in the form of lower interest rates and a better business www.oldyorkcellars.com study sought to determine the effect of interest rates on foreign direct investments inflows in Kenya. The independent variable was interest rates as measured by quarterly CBK lending rate. The control variables were economic growth as measured by quarterly GDP, exchange rates as measured by quarterly exchange rate between KSH/USD and inflation rates as measured by quarterly CPI. FDI inflows in Kenya were the dependent variable which the study sought to explain and it was measured by FDI inflows in the country on a quarterly basis. Secondary data was collected for a period of 10 years (January to December ) on a quarterly basis. The study employed a descriptive research design and a multiple linear regression model was used to analyze the relationship between the variables. Statistical package for social sciences version 21 was used for data analysis purposes. The results of the study produced R-square value of 0, which means that about 32 percent of the variation in FDI inflows in Kenya can be explained by the four selected independent variables while 68 percent in the variation was associated with other factors not covered in this research. The study also found that the independent variables had a strong correlation with FDI inflows (R=). ANOVA results show that the F statistic was significant at 5% level with a p-value less than Therefore the model was fit to explain FDI inflows in Kenya. The results further revealed that individually, interest rates, economic growth, exchange rates and inflation rates are not significant determiners of FDI inflows in Kenya. This study recommends that there is need for policy high interest rates foreign investment to regulate the interest rates prevailing in the country bearing in mind that they influence FDI inflows in the country.
URI
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University of Nairobi
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The Effect of Interest Rates on Foreign Direct Investment Inflows in KenyaRights
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www.oldyorkcellars.comDomestic interest rate, foreign direct investment, and corruption
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Department of Economics, The University of the West Indies at Mona, Kingston 7, Jamaica
Nadine McCloud
Department of Agricultural Economics, Purdue University, West Lafayette, IN,USA
Michael S. Delgado
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Correspondence to Michael S. Delgado.
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McCloud, high interest rates foreign investment, N., Delgado, M.S. Domestic interest rate, foreign direct investment, and corruption. Rev World Econ (). www.oldyorkcellars.com
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Keywords
- Interest rate
- Foreign direct investment
- Corruption
- Instrumental variables
- Generalized method of moments
- Semiparametric estimation
-