Exchange rates and governments

Exchange rates are often seen as a reflection of the stability and success of a country and, by association, of its government. A country with high investment, low unemployment and a high standard of living will be seen as stable and investors will want to buy its currency. Any sign of a decrease in these and other economic indicators may weaken its currency and therefore affect the exchange rate it can command against other currencies. It's no surprise then, that governments like to keep a close eye on exchange rates and on the policies that may affect them.

How can governments influence exchange rates?

The floating exchange rate is a system used by the majority of the world's leading economies. It allows for greater flexibility in terms of currency management and, whilst it means that the currency changes value from day to day, it gives governments greater control. The prospect of currency instability that a floating exchange rate could bring, however, means that governments must have robust economic policies in order to influence exchange rates. Governments can do this in many ways, including:

• Encouraging investment – by encouraging employers to remain in their country rather than outsourcing elsewhere, and providing incentives to overseas investors, a government provides the conditions for good trade, high employment and significant tax revenues. This is likely to strengthen the country's economy and help exchange rates.

• Encouraging trade – by building trade relationships with other countries around the world and protecting those relationships, the country strengthens its position and therefore also its currency. Maintaining the right balance of exports and imports is crucial to protecting the currency.

• Maintaining inflation – a country's inflation rate is a key indicator of its economic health. A high rate of inflation has an impact on the cost of goods and services and on the pay of workers in the public sector. Rises in inflation are often followed by rises in interest rates, which can put a squeeze on consumer spending, damaging the currency and the exchange rate. Maintaining a reasonable level of inflation is important both for good economic management and for the country's exchange rates.

Of course, the policies and actions of other governments, particularly those in the strongest economies, can also have an effect on a country's exchange rates. The constantly changing nature of the market is one of the reasons that most businesses who deal with foreign currencies choose to use an expert broker.

Foreign Currency Exchange Ltd is a commercial currency brokerage based in the UK. We help thousands of clients move hundreds of million pounds across the globe every day. From large businesses to private individuals who wish to send regular payments abroad, you can save money by getting a better currency exchange rate than your bank. Foreign Currency Exchange buys currency at wholesale rates and can help you save money with our fast secure service. For more information contact us now, telephone +44 (0) 20 7989 0000 or email info@fcexchange.co.uk.