What Affects Currency Rates?

by Sean Bryant on February 17, 2017

What Affects Currency Rates?

The value of a nation’s currency strongly influences the health of its economy, and changes in its price play a pivotal role in a country’s trade balance between imports and exports. A strong currency can negatively affect exports, making goods more expensive for foreign buyers. Conversely, a weak currency can help exports, which, in turn, supports the country’s economic growth.

If you wish to buy and sell popular currency pairs, such as EUR/USD, you can access the global foreign exchange market through trading brokers, including online platforms such as UFX.com. To take advantage of fluctuations in currency prices, you’ll need to utilize a range of trading tools and advanced charts. These can help you make informed decisions when participating in the world’s largest and most liquid investment market.

What should you monitor when trading in the FOREX market?

A Country’s Economic and Political Stability

Investors typically seek to invest in a country with a stable political situation and strong economic performance. If a nation is prone to industrial strikes, terrorist attacks, and political instability, the risk of trading on that country’s assets naturally increases. When investors lose confidence in a currency, it leads to capital outflow towards the currencies of more stable countries, which may have better long-term outlooks.

Inflation and Interest Rates

Inflation is a general and sustained increase in overall prices. In periods of low inflation, the value of a country’s currency increases, along with its purchasing power. When national inflation is high, on the other hand, the relative value of the currency decreases. Inflation is one of the key determining factors for central banks, which set interest rates in order to achieve the most advantageous economic conditions for their citizens.

Interest Rates and Currency Values

The difference between interest rates in two countries can trigger deep and lasting movements on a currency pair. Any trader seeks to invest in a strong currency with the potential for healthy returns. Demand for the currency of a country with higher interest rates will always increase, propelling its price higher at the expense of the currency whose country has lower interest rates.

Market Psychology

It’s important to follow how big and influential investors are trading on a given currency. One vital report you can use to gauge their interest in a particular currency, enabling you to take similar positions, is the COT (Commitments of Traders) published by the CFTC.

These are the important factors to consider when trading currencies. Traders are more likely to have a positive trading experience when considering these factors.

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Sean Bryant

Sean Bryant created OneSmartDollar.com in 2011 to help pass along his knowledge of finance and economics to others. After graduating from the University of Iowa with a degree in economics he worked as a construction superintendent before jumping into the world of finance. Sean has worked on the trade desk for a commodities brokerage firm, he was a project manager for an investment research company and was a CDO analyst at a big bank. That being said he brings a good understanding of the finance field to the One Smart Dollar community. When not working Sean and he wife are avid world travelers. He enjoys spending time with his daughter Colette and dog Charlie.

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