Inflation, purchasing power and exchange rates

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High inflation also affects currency markets by altering relative purchasing power between economies.

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Countries experiencing higher inflation than their peers may see downward pressure on their currencies unless offset by higher interest rates. Central bank responses are therefore crucial in determining exchange rate outcomes.

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Expectations about future inflation and monetary tightening influence capital flows, as investors seek higher real returns.

Currency volatility often increases during periods of high inflation, reflecting uncertainty about policy responses and economic stability.

 

As a result, inflation plays a central role in shaping foreign exchange dynamics.