Top 5 Factors That Influence Forex Exchange Rates

by Andrew McGuinness     Jul 16, 2019

Top 5 Factors That Influence Forex Exchange Rates

Predicting the trends in the Forex Market, isn’t always easy, especially when you’re a beginner and you’re not sure what to look at. Don’t let the constant fluctuations fool you as there are still ways to understand trends in currencies so you can make the most out of your forex investment.

Whether you’re sending money abroad or investing thousands of dollars into forex, knowing the factors that could rise or lower the currencies can make the difference between profit and losses.

What Is Forex For? Forex might simply be an investment for you, but to host countries, their own currencies can be indicative of problems or successes in their national economy. While staying updated on a country’s affairs (investments, projects, and developments, initiatives) can help you understand their projected currency’s value, there are other factors that affect foreign exchange rates that you could look into as an investor. Below are the top 5 factors that impact currencies’ values:

1. Debt

One of the most public factors you could look into is a country’s national debt. Local and international media usually publicize these debts, which can give investors like you insight on the current movement of foreign capital. As a country acquires more debt, foreign investors tend to pull out finances. Without a balanced distribution of profit and loss, there could be serious inflation, which would decrease the overall value of the country’s currency.

2. Interest Rates

Central banks are more than just regulators of currency. These institutions play an important role in determining the overall flow of capital by imposing high interest rates. High interest rates are a foreign investor’s incentive to invest. With the surge of foreign capital, the currency’s value and the dollar exchange rate will rise. On the other hand, if lower interest rates are applied, then a decrease in exchange rates may be observed.

3. Stability

Investors are the bloodline of any country’s financial make-up. Aside from corporate incentives, one thing foreign investors seek in countries is political and economic stability. It is only natural for corporations to want to thrive in the best environment possible. Countries that pose minimum risk and maximum profits become the best grounds for foreign investment.

For example, political events like civil unrest and revolutions might prove detrimental to a corporation’s growth, and can repel companies from investing in a country.

4. Inflation

It’s generally known that countries that have a record of high inflation rates see a decline in their currency’s value. On the other hand, nations with lower inflation rates witness an appreciation in their currency’s value because the purchasing power of that currency becomes more powerful as opposed to its other countries.

Predicting inflation can be easy if you know where to look. Factors such as wages, import prices, taxes, and raw material prices can contribute to inflation rates. Other economical elements such as house prices and the total amount of money in circulation can also affect inflation rates.

5. Speculation

Something as simple as popular belief can affect a currency’s exchange rate. For example, if financial experts report an expected rise in a currency’s value, investors are predicted to follow suit. As a result, the surge of investors will influence a rise in the exchange rate due the increase in the demand for that currency.

Knowing The Best Time To Trade

While other people speculate that trading forex relies heavily on luck, factors like these show that there are tangible ways to predict losses and profits from your investments. To secure your investment, make a habit of reading about trends in local and international politics to gain insight on the best instances for foreign exchange.

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