Most Influential Effects on Currency Rates
Currency rates refer to the value of a certain national or regional currency as compared to others. For instance, after the death of Osama bin Laden, the dollar rose to 81.30 yen, from 81.20 yen, while the British pound slipped to $1.6683, from $1.6706. As part of an ever-changing global economy, currency rates change every minute. Several key factors dramatically influence currency rates and are responsible for fluctuating exchange rates.
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Balance of Trade
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Just like every other commodity, a currency's value rises when demand for it rises. Individuals and organizations buy foreign currency when they want to purchase foreign products. Hence, when companies make mass purchases of foreign products, then the foreign currency rate rises sharply. Not everyone benefits though, because the other side of that coin, so to speak, is that when the value of imports is considerably higher than that of exports, then currency rates inevitably begin to drop.
Interest Rates
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As a means of attracting foreign investment, interest rates have a direct impact on currency rates. Interest rates refer to the percentage of excess value the borrower has to return to the lender in addition to the initial amount. Therefore, when interest rates are high, investors move their money to foreign banks to take advantage of the high interest rates, converting their assets to the country's currency in the process. This increased conversion to the foreign currency results in its rise in value.
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Insecure Economy
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When an economy faces major problems, such as a large public debt, foreign investors tend to push back, affecting the currency rates for the worse. Governments that struggle to eliminate the debt can print more money, which causes inflation to rise and lowers the currency's purchasing power. Another factor causing currency rates to drop is an imminent default of a country's debt, which makes foreign investors less willing to hold assets denominated in that country's currency.
Market Psychology
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Market psychology refers to investors' willingness to invest in foreign currencies based on an economy's relative stability. Market psychology is influenced by speculations as well as predictions on the short- or long-term future of an industry or an economy in general. Financial analysts depend on market trends to decide whether it will be profitable to invest in a foreign currency or not.
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