The inflation difference between two countries, or in general against the major countries, are an important factor effecting exchange rates in the long run. Here you can learn why.

A country that has lower inflation than the other tend to see its currency strengthened in the longer term. This effect can be seen in many low inflation countries, such as German before the arrival of the Euro, which historically had a low inflation and strong national currency.

This happens because the country with higher inflation will have a competitive advantage in the future, because their goods will be cheaper than other countries’ goods. This means that exports will increase, which in turn leads to a higher demand for the currency, giving a stronger currency. This effect is greatest in the case of countries that have similar export structure, competing openly on the world market.

Below, some of the most common questions about inflation are answered by our currency experts:

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