Which Factors Influence Foreign Exchange Rates? Foreign currency exchange (widely known as Forex or Fx) immensely spread financial market operated all across the world. An individual to large scale organizations, banks and even governments are involved in forex trading. The fundament of forex trading depicts that the currency is bought when its value is low and it is sold immediately when the currency value gets strengthened. Today Forex is the highest profit oriented market incurring trillions of cash turnover every day. It is the only market that stands top in terms of liquidity. Many of us may not know how the market operates yet we have an idea that trading is based on fluctuation of foreign exchange rates. Basically the foreign currency rates are the currency values of various countries globally that keeps rapidly fluctuating. Hence it is very significant to keep eye on the changing market trends and the foreign exchange rates for everyone who is involved or need to perform an international transaction. Significance of foreign exchange rates Every person have one objective whether he is trading into Fx or need to perform an occasional international transaction, that objective is to save money or make profit. This involves buying or exchanging any currencies when the buying currency rate is low. Currency rate does change on various factors and global events that are unpredictable in nature. To better explain the effects of fluctuation of foreign currency rates I am giving below example: For e.g. Current currency exchange rate of 1 USD = 0.61 GBP. Now I want to purchase jewelry worth 6000 GBP from the UK to my home in the USA. If I buy as per current rate I will be paying around 10,000 USD towards my purchase. But if I postpone my decision to tomorrow the currency rate can get a fluctuation to may be 1 USD = 0.56 GBP, which will require me to pay few hundred dollars more. And the situation can be vice a versa. Hence an individual can make profit or lose is unpredictable when it comes to foreign currency rates exchange. Which are the factors responsible in influencing foreign exchange rates? It works like a demand and supply of a commodity. For e.g. Fruits are been exported from Europe to various countries. Due climatic changes the stock got destroyed which will lead to a scarcity in the market. Ultimately the price of the fruit will be raised because of low supply. Similarly there is demand and supply rule applicable in currency rate fluctuation too. The demand of a particular currency in the market can result in the currency rate change. Investors will always demand the currency that can give high return on investment and this way the demand and price of the currency gets reflected. Foreign exchange rates fluctuates due to various factors like economic condition of the country, International trade policy, Government, national income, bank savings, inflation etc. can influence variations in foreign currency rates. Disturbance caused in demand and supply of
country’s basic merchandise/goods due the natural factors like flood, earth quake, etc. can also impact on the country’s currency rate.
Published on Feb 24, 2011