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Factors That Influence Foreign Exchange Rates

Foreign exchange is quite a fascinating concept. Lots of people are continually becoming more and more fascinated by this relatively new method of trade that occurs online. The method of trade is interestingly gaining momentum and quite a handful of people are interested in learning how it works. Forex trading can be quite lucrative for those who understand the tricks of the market. Just like with most other things, nobody is born good at this. Nevertheless, the old saying, practice makes perfect has made some people great when it comes to trading forex. This does not mean they become immune to losses. 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. The value of a country’s currency tends to appreciate when the inflation is low. Within such an environment the prices of commodities tend to increase quite slowly. To the contrary, countries that are experiencing a higher inflation rate typically experience a depreciation in their currency. This in turn leads to higher interest rates.
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The Interest Rates
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When the interest rates change, they may lead to a change in the value of currency and the dollar exchange rate. It is also important to note that there is a very high correlation between inflation, interest rates, and forex rates. Foreign investment increases in a country when its currency is appreciating as a result of increased interest rates. Such an increase also leads to a rise in the exchange rates.

Economic Performance and Political Stability

The value of a currency can be determined by the country’s economic performance and its political stability. Foreign investors are attracted to a country with less risk of political turmoil. This is because an encounter with such risks end up drawing away investors. Countries that are more stable politically usually end up enticing investors.

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 influence of the political atmosphere on the market applies to all countries even the ones that are seen as super powers with a more stable economic performance. This explains why traders need to be constantly updated on the different political atmospheres in different countries.

Trade Terms and Agreements

Trade terms basically refer to the ratio of import and export prices. When a country’s export prices are higher than the import prices, terms of trade improve. Because of the increased revenue thus leads to a higher demand of a country’s currency.