7 Factors that Can Affect Currency Rates

7 Factors that Can Affect Currency Rates

If you want to know a country’s economic health you need to look at its Foreign Exchange Rate. This is an indicator of the economic health of a country. Traders and investors trade in foreign currencies by speculating on the price fluctuations. Today, Forex is the world’s largest financial market. You need to keep this in mind that even this market is prone to fluctuations based on a lot of factors. Here we share a few factors, which can affect the online currency trading.

1. Inflation

When there is a change in market inflation, there is a fluctuation in the currency rates. This is one of the most important factors which can affect currency rates. A country which has a low rate of inflation sees an appreciation in the value of its currency. A country which has a high rate of inflation is also usually accompanied by a higher rate of interest.

2. A Country’s Balance Payments

Here, by balance payments, we mean the country’s current account showcasing its balance of trade and earnings on the foreign investment. This consists of the total number of transactions which include everything from exports, imports debts, etc. If the spending on imports is more than the earnings of the export, then this causes depreciation.

3. Government Debt

If a country has higher debt, then it has the lowest chances of attracting foreign capital. This, in turn, lowers a country’s exchange rate. This is one parameter every investor will look at to decide whether or not to invest in the country’s currency.

4. The ratio of Export Prices to Import Prices

If there are more exports than imports, then the value of the currency will appreciate. The demand increases. If the terms of trades of a country are lower, then the currency value decreases.

5. Political Situation of a Country

The political climate of a country has a direct effect on its currency. A country which has a lower risk of political turmoil looks like a better option for investments than a country which has an unsettling political situation.

6. Speculation

This is one strategy which can work in your favor or against. When investors start speculating, this can affect a country’s currency rate. This can happen if the investors feel one country’s currency value is expected to rise and the investors demand more of it. this will lead to arise in the value of the currency as there is a sudden surge in the demand.

7. Recession

When the recession hits a country, the interest rates of that country take a dip. This lowers its charges to attract more foreign capital. This leads to the weakening of the currency and therefore lowers the exchange rate.

Currency trading in India is now taking a faster pace and if you wish to do currency trading in India, then the above factors will help you make an informed decision.

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