Various Factors and Their Effect on Foreign Exchange Rate Movement

The money exchange market is a global business place and is governed by quite a number of factors. The forex market is also linked with other markets which involve currencies and their transactions. The factors themselves are interlinked and give rise to a complex system of interdependence. For someone who wants to do business on exchanging foreign currencies, it is important to understand the impact of the factors so that they get the best forex exchange rates to do business with.

A depth in the understanding of the factors which govern the short and long term effects on the currency market can also help to foresee the trends which are about to catch up with the market and thus deal accordingly.

Short Term Effects:

Short term effects are induced by factors such as the economic growth of a country, natural disasters and even political situation.

Interest Rates:

Since centralized banks are involved in forex and currency transactions, interest rates do come into play. Interest rates are the directional factors that move the money. Interest rates are linked with forex rates and inflation. An increased rate of interest provides a higher percentage to the lenders, thereby becoming desirable for foreign capital investment. This sees a bump in the rates of foreign currency exchange.

Economic Condition of a Country:

As a general rule, a strong economy translates inevitably to a strong value for the country’s currency. Investors can expect better returns on their investments and a continued phase of stability means it is good for business.

On the flip side, if a country is in debt, the chances of acquiring foreign capital diminish quite rapidly. Foreign investors go on to sell their bonds in the open market at the first sign of public debt. As a result, inflation ensues. The value of the currency falls and the forex rates take a major hit.

Balance of Payments:

Imports, exports, transactions and debt all contribute to the balance of payments. The figures of how much a country spends directly impact the valuation of its currency. A deficit in the balance of payments leads to a loss in value. This could end up as inflation and adversely affect foreign currency trading. The countries which depend heavily on foreign imports of the commodities that are used by their population is bound to have a low value on their currency. Conversely, if the country exports high-value goods then their currency will have a high value on the forex market.

Political Situations:

The political situation in a country seems to adversely affect the economy and thereby the foreign exchange market. The election of a popular leader to a position of power immediately skyrockets the stock market of that country while riots, unrest and political tension deal negative blows.

Not only national political interests but international ones too are drawn in. Conflict of interest between two countries, talks of war and battle of armaments also cause serious impacts on the currency rates and the foreign currency exchange market.

Long Term Effects:

Long term effects can immobilize market activities and harm the reputation of currencies in the foreign exchange market.

Recession:

Recession is a serious issue that cripples economies from time to time. Prices of commodities go beyond limits and the value of the currency falls. Imported items come at a cost while the export value falls rapidly. There is large scale downsizing which comes sooner than later and the economy takes a nose-dive. Recession can end up lasting for decades. Drastic measures are the only way to save an economic downturn in a recession. The deep cuts on the economy adversely affect foreign currency trades. The market value falls rapidly and forex rates are not profitable at all.

The forex market is an unpredictable one. There are risks involved and gambles that have to be played. But the gains and rewards are the answer to the hardships. Walk into the money exchange near you and start picking up on the ways of the trade to pave a bright future ahead.