The foreign exchange is not only linked to the job growth or losses but it is also strongly linked to a country’s debt.
The foreign exchange is linked to several key factors in a country’s economy and this article is aimed at discussing the association between a country’s debt and the currency exchange rate for that country currency. Almost every citizen in a country knows that the economy is connected to the job market and to the country’s debt. They do not realize exactly how much the debt that a country holds can impact the currency exchange rate and the economy overall though.
The country’s debt is a key clear indicator of how the country is doing overall and the foreign exchange market and currency exchange rates always reflects this information. If the country has a low debt ratio clearly their economy is doing better than other countries that have a high debt ratio. If a country has a higher debt ratio it means that they can’t afford their programs and that the currency will have a lower exchange rate than other countries that have a lower debt ratio. The countries that have a lower exchange rate will typically experience a better exchange rate because they are viewed as having solid economies and a stronger currency as they do not owe anyone else any money. That is looked upon favorably in the foreign exchange market.
There are a few key differences in the discussion of a country’s debt and how the whole economy is doing overall that might affect the foreign exchange positively.
The main differences of a country’s debt that might show a positive effect on their currency exchange rates is if the loan money they received has gone towards bettering their country or their situation for the long run instead of a short term solution to a problem that the country is experiencing. An example of this can be seen when a country borrows money in order to upgrade their infrastructure or towards a program that will create a huge job growth opportunity for the whole population.
This can either have one or two effects on the exchange rate of that country in the foreign exchange market.
It can leave the country’s currency exchange rate the same because it is a beneficial addition to the economy but at the same time it is still a debt that they owe to another country. It could also increase the currency exchange rate for that particular country or countries as it is making valuable improvements to the economy or to the country as a whole and that may override the influence of the debt itself that the country owes. An example of this in an ordinary person’s life is taking out a home refinance loan and then they expand on their improvements within their homes. It raises the house and property value of the home for the homeowner. It also will raise your property taxes but that is beside the point. You see how the loan is a bad thing but at the same time it is making a valid improvement on something that you already have which then brings up the value on your home. The same situation applies to countries and their loans and debt.
The other factor that can affect the country’s currency exchange rate in the foreign exchange market is the number of loans or debts that the country owes.
If the country only has one or a few debts versus other countries who owe a lot more they may still have a higher currency exchange rate than the ones who have more debts. This commonly occurs in the economic realm. It is also just plain common sense. It is like the person who has a single credit card and pays their payments on time versus the person who has five credit cards and sometimes misses their payments. That is how the foreign exchange market looks at the credit situation of a country and their debts.
Also in relation to the same debt situation is if the country is making their payments timely, paying it off in full within a good timeline or if they are unable to currently pay back their loans. The factors mentioned above in this paragraph all impact the economy and the currency exchange rates of those countries negatively on the foreign exchange market.
The whole picture has to be looked at in general when it comes to the foreign exchange market making currency exchange rates higher or lower.
The foreign exchange market just does not look at the debt factor alone but it analyzes that it in conjunction with other factors of the country’s economy. Some of them have been mentioned already in this article and in other articles. They will also look at how the country is trying to stimulate the economy to make it grow and if it is succeeding. They can usually tell by looking at two different figures the job market and the sales figures of the major retailers in that country’s particular economy. This is also why businesses tend to look at the foreign exchange market and use it as well for gaining further money for their company’s individual needs.
In summary the foreign exchange market looks at various factors that can influence the economy of each country and its currency. These factors include not only include the job market and the debt situation of each country. They also look at the larger picture of if the debt is actually helping the country’s economy or the current job market now or in the future. If it is going to make a big impact and last longer than a short term solution, which acts like a band aid for a bigger problem, then the currency exchange rate will probably either stay the same or increase on that currency. This is because it will end up helping and that is always a good thing on the foreign exchange markets outlook of a country.