Key factors that influence foreign exchange rate.
It’s no secret that the foreign exchange rate is influenced by a lot of factors. That’s why traders who want to jump into the world of foreign exchange or Forex market needs to learn what kind of factors that have an effect toward the Forex rate. In this article, we are going to learn Forex particularly about the key factors which affect the exchange rate.
6 Key Factors which Affect the Forex Rates
The exchange rate basically refers to the rate at which a country’s currency unit might be converted into another one. This thing may fluctuate in daily basis regarding the changing market drives. There are actually some factors that influence this rate with inflation rates as one of the most considered factors. Other than that, here are the five key factors which influence foreign exchange rate.
1. Country’s Current Account
A country’s current account or balance of payments reflect the balance of earnings and trade on foreign investment. It involves total amount of transactions such as its imports, exports, debt and many others. A deficit in this account because of spending more of the currency than earning will result depreciation. This thing then fluctuate the exchange rate of the country’s domestic currency.
2. Government Debt
Government debt refers to national debt or public debt owned by a central government. A country which has this kind of debt is less possible to own foreign capital, resulting to inflation. Foreign investors will tend to sell their bonds in open market when the market hints government debt in a particular country. It will be followed by the decrease of the country’s exchange rate.
3. Terms of Trade
In relative to balance of payments and current accounts, the terms of trade refer to the ratio of import and export price. A nation’s terms of trades will increase if its prices of exports boost at a greater rate compared to its prices of imports. Then, it results higher revenue that causes an advanced demand for the nation’s currency and improve in this currency value.
4. Political Stability and Performance
Political stability and economic performance is another thing that can influence a country’s currency strength. A country which shows less risk of political chaos is more appealing for foreign investors. It is then resulting investors to stay away from other countries with more economic and political stability. However, a country which is prone to political confusion may find exchange rate depreciation.
5. Recession
Furthermore, there is also recession that is able to have an effect toward foreign exchange rate. When there is recession happens to a country, the country’s interest rates are more likely to fall. In this case, it decreases its opportunities to acquire foreign capital. In consequence, this country’s currency will weaken in contrast to other countries which then lowering the exchange rate.
6. Speculation
Speculation is another factor that can influence the exchange rate of a country. When certain country’s value of currency is anticipated to increase, investors will demand more of this currency so that they can gain profit later on. As a consequence, the currency value of this country will increase because of the improvement in demand. It comes to play in the exchange rate as well.
Those are several key factors which determine the Forex rate fluctuations. If you are
trading Forex and need some factors to consider as you analyze the movement of exchange rate, you can take these key factors into account to learn how the market is going. The last but not least, you shouldn’t forget to learn Forex constantly if you want to maximize your trading profit.