Factors That Influence Foreign Exchange Rates Forex is a very intriguing concept. Many people are becoming more and more intrigued by the relatively new method of trade that can can be carried out online. This method of trading is becoming quite popular and people are out to learn the skills and techniques in order to find a good source of income. Forex is very lucrative to those who understand the intricacies of the markets. Just like with most other things, nobody is born good at this. However, there are people that have been at it for a good amount of time and practice has made them perfect. This is not to say that they don’t make any losses here and there at some point. Nevertheless, having understood the variables involved, they are more likely to succeed in trading forex. Here are some of the factors that influence the exchange rates in forex. Inflation The currency exchange rates in most cases fluctuate due to market inflation. If a country’s inflation is low, then the value of its currency appreciates. In such a country, the price of goods and services end up increasing at a very slow rate. To the contrary, countries that are experiencing a higher inflation rate typically experience a depreciation in their currency. This will in turn lead to higher interest rates.
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Rates of Interest
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A change in the rates of interest can cause a significant shift in the value of currency as well as in the dollar exchange rates. In addition to this, a very strong connection also exists between interest rates, inflation and forex rates. The increase in interest rates automatically causes currency appreciation which leads to more foreign investment. This increase facilitates a rise in a country’s exchange rates. The Political Stability and Performance The political state in a country and its economic performance can greatly affect a country’s currency. Foreign investors are attracted to a country with less risk of political turmoil. These risks draw away investments from countries. Investors are more likely to invest in countries that offer political stability. Political instability in some countries results in depreciation in exchange rates and for those countries that are more stable they tend to have strong trade and financial policies that facilitate the appreciation in exchange rates. However, the political atmosphere is not just limited to specific countries, even those that are seen to be strong economically or referred to as super powers generally have a great influence on the stability of markets depending on the current political events. This is the reason why traders will always seek to know more about political and economic news happening around the world. Terms of Trade When we talk about terms of trade, it means the ratio of export prices to import prices. When a country’s export prices are higher than the import prices, terms of trade improve. This leads to a higher demand for a country’s currency as a result if the increased revenue.