Therefore, despite low-interest rates and low growth in Japan, the Yen kept appreciating. In 20, the value of the Japanese Yen and Swiss Franc rose because markets were worried about all the other major economies вЂ“ US and EU. This is a similar factor to low inflation. For example, if the UK has long-term improvements in labour market relations and higher productivity, good will become more internationally competitive and in long-run cause an appreciation in the Pound. If British goods become more attractive and competitive this will also cause the value of the exchange rate to rise. The fall in the value of the Pound post-Brexit was partly related to the concerns that the UK would no longer attract as many capital flows outside the Single Currency. For example, if markets see news which makes an interest rate increase more likely, the value of the pound will probably rise in anticipation. Therefore movements in the exchange rate do not always reflect economic fundamentals but are often driven by the sentiments of the financial markets. This increase in demand will cause the value to rise. If speculators believe the sterling will rise in the future, they will demand more now to be able to make a profit. Cutting interest rates tends to cause a depreciation.Higher interest rates cause an appreciation.This is known as вЂњ hot money flowsвЂќ and is an important short-run factor in determining the value of a currency.

You will get a better rate of return from saving in UK banks. If UK interest rates rise relative to elsewhere, it will become more attractive to deposit money in the UK. For example, the long-term appreciation in the German D-Mark in the post-war period was related to the relatively lower inflation rate. Therefore countries with lower inflation rates tend to see an appreciation in the value of their currency.Also, foreign goods will be less competitive and so UK citizens will buy fewer imports. If inflation in the UK is relatively lower than elsewhere, then UK exports will become more competitive, and there will be an increase in demand for Pound Sterling to buy UK goods. Depreciation / devaluation = decrease in value of exchange rate.Appreciation = increase in value of exchange rate.In this example, a rise in demand for Pound Sterling has led to an increase in the value of the ВЈ to $ вЂ“ from ВЈ1 = $1.50 to ВЈ1 = $1.70 However, if markets were worried about the future of the US economy, they would tend to sell dollars, leading to a fall in the value of the dollar.Дetermination of exchange rates using supply and demand diagram.If US business became relatively more competitive, there would be greater demand for American goods this increase in demand for US goods would cause an appreciation (increase in value) of the dollar.Exchange rates are determined by factors, such as interest rates, confidence, the current account on balance of payments, economic growth and relative inflation rates.

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