Mostly, currencies are dependent on each other in accordance with the interest and exchange rates.  In global markets, the value of the dollar against other currencies impacts the inflation rate in a significant manner as the currency value fluctuates with the change in dollar value against it. Mostly, the value of a currency is determined by its comparison with the dollar value.

The inflation rate is one of the influential factors of the economy. If the economy is doing good, inflation rates won’t influence much but if there is slow growth, consequences will be there. The currency exchange rate has a direct impact on the economy because it causes fluctuations to the inflation rates.

If the local currency appreciates against the dollar value, it reduces the inflation rate because imports become cheaper which impacts the economy in a positive way by lowering the prices of goods and services. Strong currencies around the world can help to reduce inflation rates. When a currency appreciates it also impacts the local economy in a negative way by decreasing the demand for local products and services.

With a weaker currency, it becomes difficult for a country to reduce inflation rates. Depreciation of local currency raises the exchange rates and the imports become more expensive. With weaker currencies the additional cost is added to the prices, eventually increasing the inflation rates. When a local currency depreciates, it benefits the local products by increasing demand for it as compared to imports.

 

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