Anyone can tell you that it is simply the case of supply and
demand that causes currency prices to change.
That is true: like any market, the foreign exchange market is driven by the forces of supply and demand. The prevailing exchange rate represents the rate at which these forces find balance. When there are more buyers than sellers in the market, the rate goes up, and when there are more sellers than buyers, the rate goes down.
However, what is it that causes these continuous changes - what makes these forces to shift and currency prices to fluctuate, sometimes drastically?
In the last decade, we have seen many massive fluctuations in the foreign currency market. The foreign exchange market has become a truly global marketplace, with buyers and sellers from all over the world trading trillions of dollars each day. Because of this, the macroeconomic trends and events impact the foreign exchange market like no other market.
The particular foreign currency is valued based on the economic health of that particular nation. The government (or, sometimes, a private organization) regularly releases reports called "economic indicators" that detail a country's economic performance. Economic indicators include gross domestic product (considered an important, although lagging indicator), inflation rates, consumer price index (prices of exports change in relation to that country's currency strength), retail sales, industrial production (utility production especially), unemployment numbers, housing stats, and so on. All these can tell us whether a country's economy has improved or declined, thus causing price and volume movements of a country's currency on the foreign exchange market.
Often, markets will move in anticipation of a certain economic indicator, or a report that is due to be released. However, the differences between the market expectations and the actual results can be significant.
Changes in international capital markets are an important, transparent, and accessible indicator of the direction of the market. A country that is all of a sudden selling off too many securities in the international capital market is clearly experiencing investment trust crisis, and that is going to affect the value of that currency in the foreign exchange market.
A country's central bank can participate in the foreign exchange market by buying or selling its currency, in order to stabilize it in accordance with its monetary policy. Predictions on future monetary policy of a country will influence the exchange rates.
Other influences on a country's currency price include the political stability of a country, international trade, balance of payments, interest rates, and many other factors. However, the exchange rates do not follow only the logical, factual reasons, but are also influenced by the market's emotions, expectations and judgments. Most of the transactions are speculative in nature!
That is true: like any market, the foreign exchange market is driven by the forces of supply and demand. The prevailing exchange rate represents the rate at which these forces find balance. When there are more buyers than sellers in the market, the rate goes up, and when there are more sellers than buyers, the rate goes down.
However, what is it that causes these continuous changes - what makes these forces to shift and currency prices to fluctuate, sometimes drastically?
In the last decade, we have seen many massive fluctuations in the foreign currency market. The foreign exchange market has become a truly global marketplace, with buyers and sellers from all over the world trading trillions of dollars each day. Because of this, the macroeconomic trends and events impact the foreign exchange market like no other market.
The particular foreign currency is valued based on the economic health of that particular nation. The government (or, sometimes, a private organization) regularly releases reports called "economic indicators" that detail a country's economic performance. Economic indicators include gross domestic product (considered an important, although lagging indicator), inflation rates, consumer price index (prices of exports change in relation to that country's currency strength), retail sales, industrial production (utility production especially), unemployment numbers, housing stats, and so on. All these can tell us whether a country's economy has improved or declined, thus causing price and volume movements of a country's currency on the foreign exchange market.
Often, markets will move in anticipation of a certain economic indicator, or a report that is due to be released. However, the differences between the market expectations and the actual results can be significant.
Changes in international capital markets are an important, transparent, and accessible indicator of the direction of the market. A country that is all of a sudden selling off too many securities in the international capital market is clearly experiencing investment trust crisis, and that is going to affect the value of that currency in the foreign exchange market.
A country's central bank can participate in the foreign exchange market by buying or selling its currency, in order to stabilize it in accordance with its monetary policy. Predictions on future monetary policy of a country will influence the exchange rates.
Other influences on a country's currency price include the political stability of a country, international trade, balance of payments, interest rates, and many other factors. However, the exchange rates do not follow only the logical, factual reasons, but are also influenced by the market's emotions, expectations and judgments. Most of the transactions are speculative in nature!
Source: EzineArticles.
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