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How does inflation affect the exchange rate between two nations?

October 17, 2017

The rate of inflation in a country can have a major impact on the value of the country’s currency and the rates of foreign exchange it has with the currencies of other nations. However, inflation is just one factor among many that combine to influence a country’s exchange rate. Inflation is more likely to have a significant negative effect, rather than a significant positive effect, on a currency’s value and foreign exchange rate. A very low rate of inflation does not guarantee a favorable exchange rate for a country, but an extremely high inflation rate is very likely to impact the country’s exchange rates with other nations negatively.