The forex market is a worldwide community. Every day, millions upon millions of buyers and sellers participate in trading various currencies.
It is noticeable that forex (foreign exchange) is a global activity. It is a transaction or an agreement to exchange a specific country’s currency for another at an agreed value. Foreign exchange does not only happen in large markets, it happens to individuals as well. For example, when a tourist from Europe decides to buy a souvenir in America which is priced with dollar, s/he will have to trade euro for dollars in order to buy that certain souvenir. Hence, forex is a global activity and worldwide economic events play a very significant role in affecting the price of forex.
There are many factors that affect foreign exchange prices. Everything that influences the circulation of money in a country has a possibility to affect the values of a certain currency. Newbies who are not yet familiar with forex should pay attention to these various events. Here are some of the major factors that drive the value of a currency:
It is a major increase in prices and a falling purchasing value of money. A chain reaction happens during an inflation. When the prices of goods and services in a country increases it reduces the demand for goods and services. As a result, the country’s exports decreases as well. If the country’s exports are less than its supply, then it has lesser foreign currency to pay for its imports. Making its government request for more foreign currencies from other countries. Thus, the demand for foreign currency increases. When demand for foreign currencies increases, the country will have to pay more national currency to acquire foreign currencies. In other words, the country’s currency devalues against a foreign currency.
- Interest Rates
This is the rate for borrowing money. A country’s central bank often sets its interest rates. It is a principal tool of the central bank to regulate inflation and exchange rates. If the interest rates are low then people will start to borrow more money. When people have more money, they start to spend more on goods and services. Thus, the demand in the economy increases which results in an increase in demand. An increase in demand will also increase in price and when prices increase it is called inflation.
- Political Conditions
The political structure of a country plays an important role in its nation’s economic impression and currency value. Forex traders consistently monitor political news and events to predict the upcoming movement of the administration in its economy. These can be an increase in spending or restriction in a certain industry. One of the factors that determine the economy of a country is its government. Often times, a political crisis brings a lot of doubts about development and hinders economic growth and its nation’s currency value. A change in leadership or an upcoming war may result in a discreet investment approach, decreasing the nation’s cash flow.
The foreign exchange market is majorly influenced by economic indicators that signal its nation’s economy. The economy of a country is the most valuable cause of its currency’s value. Therefore, observing and having knowledge about a nation’s economy will help a trader progress and abreast in competing in the world of forex.