Have you ever wondered what causes the value of the dollar to fluctuate so much? Unfortunately, the answer isn't that simple, as there are several factors at play. In this post we're going to talk about them and try to give you an overview of how each of them plays a role in determining the value of the dollar.

1.Inflation rate

Firstly, changes in market inflation cause changes in exchange rates. So, a country with a lower inflation rate than another will tend to see an appreciation in the value of its currency, seeing the prices of its goods and services rise at a slower rate. In other words, a country with a consistently lower inflation rate exhibits an increasing monetary value, while a country with higher inflation generally sees depreciation in its currency. When comparing the United States and Brazil, we can see that the US has historically had a much lower inflation rate than Brazil, contributing to its stronger currency.

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2. Interest rates

Changes in the interest rate affect the value of the currency and the dollar exchange rate. Exchange rates, interest rates and inflation are correlated. Increases in interest rates cause a country's currency to appreciate because higher interest rates provide higher returns to lenders, thus attracting more foreign capital, which causes an increase in exchange rates. Brazil over the years has had a higher interest rate than the US as a way of controlling higher inflation. This is a factor that makes the Brazilian currency stronger than the American one. However, in an attempt to stimulate the economy, Brazil's Central Bank has been adopting a more expansionary monetary policy, lowering its interest rate accordingly.

3. A Country's Current Account / Balance of Payments

A country's current account reflects its balance of payments and foreign investment earnings. It consists of the total number of transactions, including exports, imports, debt, etc. A current account deficit due to spending more of its currency on importing products than it earns from selling exports causes the national currency to depreciate.

In 2019, Brazil ended the year with a current account deficit of US$ 50.762 billion, the largest annual deficit since 2015. When you see news like this, a savvy person should already realize the negative impact it could have on the Brazilian real.

4. Government debt

Government debt is public debt or national debt owned by the central government. A country with public debt is less likely to acquire foreign capital, leading to inflation. Foreign investors tend to sell their bonds on the open market if the market predicts public debt within a given country. And as a result, there will be a decrease in the value of its exchange rate. At the end of 2019, Brazil's public debt reached a total of R$ 4.248 trillion.

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5. Terms of trade

In relation to current accounts and the balance of payments, the terms of trade are the ratio between export prices and import prices. A country's terms of trade improve if export prices rise at a higher rate than import prices. This results in higher revenue, which causes greater demand for the country's currency and an increase in the currency's value.

6. Political stability

A country's political stability and economic performance can affect its monetary strength. A country with less risk of political turmoil is more attractive to investors from other countries, increasing foreign capital. This increase in foreign capital, in turn, leads to an appreciation in the value of its national currency. A country with a sound financial and trade policy leaves no room for uncertainty in the value of its currency, but a country prone to political turmoil may experience a depreciation in exchange rates.

Everyone who lives in Brazil is kind of used to this kind of problem that has arisen in our country. A clear example of this is illustrated in the chart below from May 2017, where it's easy to see the leap the dollar took on the 18th. This occurred when the newspaper "O Globo" published the news that the owner of the company JBS recorded the former President of the Republic, Michel Temer, giving his approval to buy the silence of the former Speaker of the House, Eduardo Cunha. In other words, a clear example of political instability.

7. Recession

When a country goes through a recession, its interest rates are likely to fall, decreasing its chances of acquiring foreign capital. As a result, its currency weakens compared to that of other countries, thus lowering the exchange rate.

8. Speculation

If the value of a country's currency is expected to increase, investors will demand more of that currency in order to make a profit in the near future. As a result, the value of the currency will rise due to increased demand. With this increase in the value of the currency, the exchange rate also increases.

Conclusion

All these factors determine exchange rates, so if you're planning to send money abroad, for example, it's worth keeping up to date with these factors to assess when is the best time to make the transfer. However, because there are so many factors that influence the exchange rate, I think it's clearer why it's so difficult to accurately predict the value of the dollar.

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I have other questions! Who should I talk to?

In all these cases, The Florida Lounge can help you understand the impacts of events like this on the real estate market in Florida! Our relationship agents have expertise in real estate investment for Brazilians in the state of Florida and can accompany the entire process of acquiring your dream home, assisting with visa issues, bank accounts, remittances and much more. [/mpc_textblock][mpc_button mpc_tooltip__text="SW52aXN0YSUyMG5vJTIwc2VjdG9yJTBBaW1vYmlsaWFyaW8lMjBuYSUyMEZsb3JpZGE="]
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