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The Currency Exchange Rate is one of the most important means to quantify the country’s level of economic stability and economic health. It refers to the “rate at which one country’s currency may be converted into another”.
The market where these currencies are regularly traded is called Forex. The Forex market, the most liquid market in the world, includes all of the global currencies. There is no central marketplace for trading these currencies; however, there are financial centers in Singapore, New York, Tokyo, Zurich, London, Sydney, and Paris.
Exchange rates fluctuate regularly with diverse market factors affecting it such as inflation and government debt. If you are planning to send or receive funds from overseas, you need to be in constant lookout of the changes in the foreign exchange rates.
INFLATION RATE
A country’s inflation rate causes a change in the value of its currency. For example, if Singapore experiences high inflation, you will observe a depreciation in the Singapore Dollars (SGD). This high inflation is typically related to the higher interests rates. In contrast, if Singapore experiences low inflation, you will observe an appreciation in SGD. And the prices of the goods and services will increase at a slower rate.
The average inflation rate in Singapore from 1962 to 2016 is 2.69% – reaching its all time low of -3.10% in 1976.
This observable negative inflation or deflation is not good. It happens when the prices of the commodities fall because the supply is greater than the demand. It can ripple the economy and later lead to high unemployment, recession, and depression.
GOVERNMENT BUDGET
A government’s budget surplus or deficit have an impact to the currency exchange rate. For instance, when our government’s budget surplus is expanding, the exchange rate of SGD will grow competitive.
The financial regulatory authority and central bank of Singapore is called The Monetary Authority of Singapore (MAS). An important institution that supports the effectiveness of the interventions given by MAS is the Central Provident Fund.
INTEREST RATE
The interest rates set by the central banks influence the customers and investors. First, it affects the borrowing behavior of customers. If the economy is overheated, central banks may increase its interest rates to make borrowing more expensive and discourage people.
Second, it affects the balance between the investor’s safety of funds and the yield returns. For example, the yields for assets in SGD increases as interest rate goes up. This leads to an increased demand by investors and eventually lead to the appreciation of Singapore’s currency.
GOVERNMENT DEBT
The government debt (public debt or national debt) is the balance owed by the government. Countries with immense amounts of government debt are less likely to receive foreign investors and foreign capital. As an effect, decrease in the value of their currency exchange rate will follow.
The is 105.6% as of 2015. This signifies the country’s ability to pay back its debt.
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