Exchange Rates – Professional Forex Course Part 21
Many factors influence exchange rates and an accumulation of various things drive market movement.
As the currency market is so volatile it can appear to be a little daunting at first, but it’s important to be aware of the major market movers as these can have short and long-term effects. Here are some of the more important factors to watch out for:
There is a strong correlation between the interest rates imposed by a nation’s central bank and exchange rates. Interest rates have the power the increase or decrease the value of a currency, and even hints that interest rates will be cut or hiked can be enough to have a serious impact.
Higher interest rates offer lenders a higher return on their investments relative to other nations. This then attracts foreign capital which causes the exchange rate to rise. However, if inflation is higher than in other related countries, the exchange rate will be driven down.
You are essentially investing in a country when you buy its currency. When a country’s economy grows in strength more people want to invest in that country and the currency can strengthen as a result. Similarly, if a country’s economy contracts, people want to sell assets connected to that country and its currency can fall.
A country’s economic stability is another very important factor which can influence the value of a currency. This is due to people wanting to safeguard their money. In general, the more unstable the economy of a country is, the less investment in it there is likely to be – this inevitably devalues that country’s currency.
A country’s trade and capitals flows, or the trade balance of a country’s imports relative to their exports, will affect its currency’s value. The more a country exports, the more businesses demand that country’s currency which can then drive the currency upwards.
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