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Factors Affecting Forex Market Trading
The Forex Exchange Rate is one of the most important determiners of a healthy and well-performing economy. It provides information about economic stability which is constantly studied and monitored by economists and big financial institutions. Whether the person is sending money abroad or receiving money from abroad, he has to consistently keep a track on the exchange rate.
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The exchange rate in simpler terms can be defined as the rate in which one currency can be converted into another rate. The currency of one country is measured in terms of the currency of another country. It is not a constant figure. It can change with the changes in the value of demand and supply of the countries. To exchange money between different countries, it is imperative to understand the factors determining and influencing the exchange rates.
- Inflation Rates
The changes in the inflation rates influence the exchange rates. The country having a low inflation rate will see an appreciation in its currency with respect to the currency of another country. There will be a slow increase in the prices of goods and services if the inflation rate is low. Countries reflecting high inflation rates depict a strong currency whereas countries with low inflation rates will witness depreciation in their currency value which is followed by high-interest rates.
- Interest Rates
The fluctuation in the value of interest rates can influence the foreign exchange rate. Inflation, interest rate and foreign exchange rates are interdependent with each other. The rise in a country’s interest rate will lead to appreciation in the value of a country’s currency as it enables high-interest rates to the lenders which attract foreign capital and causes a fluctuation in the foreign exchange rates.
- Country’s Current Account and Balance of Payments
The country’s balance of payment influences the country’s foreign exchange rate. The country’s current account consists of information about the balance of trade and foreign investments. It includes information about the values of exports, debt, imports etc. A deficit in the current account can happen if the country is importing more than it can make sales or exports to the other countries. This, in turn, causes depreciation in the value of the domestic currency. The balance of payment influences the value of domestic currency.
- Government Debt
The foreign investors determine the government debt of a particular country before deciding to spend money in that country. The government debt is owned and managed by the Government. Countries which have huge debt will attract less foreign investments which will lead to inflation. This will cause a decrease in the value of the exchange rate. Investors will sell bonds to countries which have considerably low government debt.
- Terms of Trade
A bit similar to the balance of payments, the terms of trade refers to the ratio of values of exports and imports. A country’s terms of trade are said to be at a better position if the value of exports is more than the value of imports. The country makes higher revenues, thereby increasing the value of the currency. This leads to an appreciation in the value of foreign exchange rate.
- Political Stability & Performance
The political and social factors affect the foreign exchange rate. Countries with less political disturbances will create a favourable environment for foreign investments. Foreign investors would love to spend money in economics that has a stable political climate. The increase in foreign investments causes an appreciation of the domestic currency. A stable political climate is an indicator of economic stability and growth. Countries that have sound economic policies will attract more foreign investments than countries which are marked by political disturbances and uncertain economic policies.
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