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Emerging Markets: What Makes Exchange Rates Move

Part of the Emerging Markets For Dummies Cheat Sheet

Changes in the value of currency affect the value of your overall investment in emerging markets. The prices go up and down, appreciate and depreciate, but what's good and what's bad? It all depends. Here are some guidelines to help you figure out what's happening when exchange rates move. Keep in mind that some effects may be stronger than others.

  • If interest rates go up, then foreign investors will want to invest, and the currency will increase in value.

  • If inflation goes up, then consumers will look for cheaper imported goods, and the currency will decrease in value.

  • If the risk in a country increases, then investors will want to put their money in less risky places, and the currency will decrease in value.

  • If a country produces popular goods for export, then customers in other countries will need money to buy the products, and the currency will increase in value.

  • If a country imports more goods, then people in the country will need to buy foreign currency to pay for them, and the currency will decrease in value.

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