There are different factors that directly and indirectly determine the exchange rates in the foreign exchange (forex) market. These determinants are often caused by the changes and trends in the global economy and among its participating financial entities such as banks, investment management firms, commercial companies, forex brokers, hedge funds, and many more.
Take a closer look at the factors influence today’s Forex exchange rates:
- Market Inflation
Inflation rates greatly affect currency exchange rates, and this factor is largely significant so that a country with lower inflation can enjoy a rising currency value while a nation experiencing higher inflation will expect depreciation in their currency.
Naturally, a country suffering from an economic recession can expect a fall in their interest rates. This, in turn, paralyzes the country’s options to acquire foreign capital. The result is a weakened currency, thus, a lower exchange rate, in comparison to other countries with a healthier economy.
- Interest Rates
As mentioned in the previous section, the changes in the interest rates correspond to a proportional change in the country’s currency value. In addition, such status can also affect dollar exchange rate. In other words, higher interest rates mean appreciation, and ultimately, a rise in exchange rates.
- Market Speculation
The expectation of a country’s stable political environment, as well as its optimistic economic performance in the near future, can often attract a high demand for their currency from investors. The demand will directly result in a higher currency value, thus, a rise in the exchange rate. On the other hand, countries under political and economic turmoil can easily scare away potential investors.
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