Which factors influence the exchange rate?

[sanjay.patel]

Today, We would be going back to the basics and understanding " How Forex works ?''

As you may know any other market demand and supply determine the price of an asset, in this case the asset is the exchange rate between one currency and another currency.

Exchange-rate Regime

This is valid for a currency regime with free floating rates. The other two main exchange rate regimes are:

- the so called pegged float and
- the fixed rate regime

Currencies such as the Chinese Yuan are not floating freely as they are allowed only to trade within a limited range around a certain price level (pegged float). It is almost impossible to make money trading a currency like the Yuan which can only be traded in a fixed corridor. Other currencies are fixed completely to the value of another currency and are not tradable independently.

Four Main Fundamental Factors

If you trade the highly liquid major currency pairs which are available to trade via the Forexchampionship you need to be aware of the fundamental factors which influence the exchange rate between two currencies.

The four main factors are:

-Inflation
-Monetary policy
-Economic growth
-Interest rates

These factors are linked and influence each other. Furthermore the creditworthiness of a country and its status as a reserve currency play an important role.

These are the most important fundamental factors which can influence a currency but certainly this list is not “complete”.

Other Factors

As we have seen lately with the tensions between Russia and Ukraine – geopolitical events can influence currency prices. The immediate reaction of the market after the events in Ukraine over the weekend was to buy the US dollar and the Japanese yen.

The USD is still the world’s reserve currency No.1 and the yen is the favorite funding currency in the carry trade. In times of crisis investors seek the “safe haven” of the US dollar and carry trades get unwinded as they are considered risky.

Conclusion

If you are aware of what’s driving a specific currency fundamentally and if you manage to combine this knowledge with technical analysis you have a good chance to succeed in currency trading.

[profit]

One more factor is unexpected developments such as natural calamities, wars, political instability (for example in Ukraine) and great deal of other factors that have decent impact but almost impossible to predict.

[raheelrehman]

In my view, I can tell you that the ratio of inflation, then the Monitory policies and after that interest rates by the central banks play role for big fluctuations, if we see the economical events of USD then Jobless claims, building permits, PMI and durable goods orders also play role in fluctuation of market, in the past, Ban Barnanke (the former Fed-chairman) speech also changed the market, now Janet Yellen speech also change the market a bit, but not more than Ben. on other side, if we see ECB, the president Mario Draghi speech also play role in the fluctuation.

[sichone]

A price of a pair traded will moved fast in the market because of some factors, and as long as I see, the main factor is the macro economic of a country. Here, I mean that the macro economic which is related with the pair we trade. We can see one of this statement comes from the inflation.

[profit]

In my view, I can tell you that the ratio of inflation, then the Monitory policies and after that interest rates by the central banks play role for big fluctuations, if we see the economical events of USD then Jobless claims, building permits, PMI and durable goods orders also play role in fluctuation of market, in the past, Ban Barnanke (the former Fed-chairman) speech also changed the market, now Janet Yellen speech also change the market a bit, but not more than Ben. on other side, if we see ECB, the president Mario Draghi speech also play role in the fluctuation.

I snatched a good chunk of pips with Broker during Greece crysis it's not so hard to predict medium-term movement of the EUR this days. Many EUR/ pairs are highly correlated we can increase our return using combined schemes of hedging with them.

[guruforex]

Speeches also influences the Forex market. It is speeches by top financial institutions members or chair persons. If chairman of BoE makes a speech, we can expect some movement in the GBP. It will either by downward or upward, either way, if you are right about its impart you will make a profit.

[Raimondo Trentini]

8 Key Factors that Affect Foreign Exchange Rates

• Inflation Rates. Changes in market inflation cause changes in currency exchange rates. ...
• Interest Rates. Changes in interest rate affect currency value and dollar exchange rate. ...
• Country's Current Account / Balance of Payments. ...
• Government Debt. ...
• Terms of Trade. ...
• Political Stability & Performance. ...
• Recession. ...
• Speculation.

[Danielpeters]

Common Factors Affecting Exchange Rates

• Inflation Rates
  
  Changes in inflation cause changes in currency exchange rates. Generally speaking, a country with a comparatively lower rate of inflation will see an appreciation in the value of its currency. The price of goods and services increases at a slower rate when inflation is low. Countries with a continually low inflation rate exhibit an increasing currency value, whereas a country with higher inflation typically experiences depreciation of its currency and this is usually accompanied by higher interest rates.
• Interest Rates
  
  Interest rates, inflation and exchange rates are all correlated. Central banks can influence both inflation and exchange rates by manipulating interest rates. Higher interest rates offer lenders a higher return compared to other countries. Any increase in a country's interest rate causes its currency to increase in value as higher interest rates mean higher rates to lenders, thus attracting more foreign capital, which in turn, creates an increase in exchange rates.
• Recession
  
  In the event a country's economy falls into a recession, its interest rates will be dropped, hindering its chances of acquiring foreign capital. The consequence of this is that its currency weakens in comparison to that of other countries, thereby lowering the exchange rate.
• Current Acco unt /Balance of Payments
  
  A country's current acco unt reflects its balance of trade and earnings on foreign investment. It comprises of the total number of transactions including exports, imports and debt. A deficit in its current acc ount comes as a result of spending more of its currency on importing products than through exports. This has the effect of lowering the country's exchange rate to the point where domestic goods and services become cheaper than imports, thereby generating domestic sales and exports as the goods become cheaper on international markets.
• Terms of Trade
  
  Terms of trade relate to a ratio which compares export prices to import prices. If the price of a country's exports increases by a higher rate than its imports, its terms of trade will have improved. Increasing terms of trade indicate a greater demand for a country's exports. This, in turn, results in an increase in revenue from exports which has the effect of raising the demand for the country's currency and an increase in its value. In the event the price of exports rises by a lower rate than its imports, the currency's value will decline in comparison to that of its trading partners.
• Government Debt
  
  Government debt is public debt or national debt owned by the central government. Countries with large public deficits and debts are less attractive to foreign investors and are thus less likely to acquire foreign capital which leading to inflation. Foreign investors will forecast a rise government debt within a particular country. As a result, a decrease in the value of this country's exchange rate will follow.
• Political Stability and Performance
  
  A country's political state and economic performance can affect the strength of its currency. A country with a low risk of political unrest is more attractive to foreign investors, drawing investment away from other countries perceived to have more political and economic risk. An increase in foreign capital leads to the appreciation in the value of the country's currency, but countries prone to political tensions are likely to see a depreciation in the rate of their currency.

[bravo]

In my view, I can disclose to you that the proportion of swelling, at that point the Monitory approaches and after that loan costs by the national banks assume job for enormous variances, on the off chance that we see the efficient occasions of USD, at that point Jobless cases, building licenses, PMI and tough merchandise arranges additionally assume job in vacillation of market, before, Ban Barnanke (the previous Fed-executive) discourse likewise changed the market, presently Janet Yellen discourse likewise change the market a bit, however not more than Ben. on opposite side, on the off chance that we see ECB, the president Mario Draghi discourse likewise assume job in the vacillation.

[Noin1976]

5 factors that influence exchange rates

1. Inflation
2. Interest rates
3. Speculation
4. Balance of payments/current account deficit
5. Public debt

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