One of the main factors that should be considered in order to predict the movements in exchange rates is inflation rate among countries. The currencies of countries with high inflation rates tend to fall in value, depreciate. However, we would like to highlight the fact that in some cases, countries maintain high values of their currencies, when it actually should depreciate. Therefore while predicting exchange rate movements, as an analyst we should take into consideration some other factors such as monetary policy, types of exchange rate systems practiced by the country. Another factor that could be used in order to foretell the currency appreciation or depreciation is interest rates. Countries, which have high interest rate, will experience their currencies to depreciate compared to those with lower rates.
Forward rates may also be considered in some instances as good indicator for the estimation of currency appreciation or depreciation. If the currency is sold at forwards, there is likelihood that the currency will appreciate, and vice versa.
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