Forex Market: Variables that affect Exchange Rates

Forex trading laptop

In the Forex market, currencies are traded through their exchange rate. We can define the price of one currency in terms of another. In other words, it is a multilateral quote that measures the global value of a currency in the exchange market.

Now, this exchange rate in many opportunities will be affected by different variables that make it increase or decrease the value of a currency. These are some variables:

  • Interest rates: If the interest rate of a currency rises compared to those of other currencies, you will want to buy financial instruments denominated in that currency. In order to do this, the currency in question will have to be previously purchased, strengthening its exchange rate.
  • Inflation rates: The inflation that can affect a currency, reduces the amount of assets that can be acquired with a certain amount of that currency. Thus, if the inflation of one currency is higher than that of another, the exchange rate of both currencies will reflect the loss of value of the currency with the highest inflation.
  • Offer of financial assets: In the event that the offer of a currency increases rapidly, the value of financial assets denominated in the currency will decrease.
  • Change in resources: Since if a country’s wealth increases, its currency is strengthened.
  • Trade: If a certain country has a trade balance deficit and is making transfers abroad, its currency weakens.
  • Central bank intervention: When central banks buy or sell currency, they affect the supply and demand of said currency, and therefore its price or exchange rate.
  • Expectations and uncertainty: Many times they create expectations about changing various factors that can explain the anticipated behavior of supply and demand for currencies.

As we already know, the foreign exchange market is one of the largest markets in the world and in it continuous changes are taking place that makes the different currencies are in continuous movement, and even more so today with the great crisis it affects everyone.

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