The value of currencies changes from time to time. This change in the value or the rates of currencies is caused by either a base or a counter currency appreciating or depreciating in value over the other specific currency pricing pair.
This value may change between interbanks (banks that trade with each other electronically). For example 1.2500 EUR/USD means that the value of one EUR 1.2500 times the value of one USD.
This value may increase to mean that the value of the base currency which is EUR has appreciated or decrease to mean that its value has depreciated against the USD which is the counter currency in this case.
These factors, as will be discussed below, affect not only the people involved in the forex trading but everyone in the specific region of fluctuation.
Balance Of Payments
Balance of payments is the sum of all economical and financial transaction done between a country and the outside world. In this case the outside world means any transaction done outside the country. Many countries in the world import and also export goods and services from and to other countries respectively.
These result to an increase in foreign revenue, foreign currency and demand. When there is increased supply of a certain currency and the demand is constant, the value of the currency increases and the opposite is also true which means economic and financial transactions affect the forex exchange rates.
Predictions of the Market
Most of the forex traders use judgment and predictions to know how certain market foreign exchange rates will be.
This kind of prediction is governed by political and economic stability of a country. It basically involves a lot of observation and going through large volumes of data in order to make the right decisions.
These decisions may at times be wrong or incorrect resulting to very high fluctuations in the currency exchange rates.
Currency Exchange Interest Rates
Interest rates affect forex exchange rates in that when the currency interest rate is lower than the other in the pricing pair, the interest rate falls.
This would mean, for example, that more EUR would be sold increasing supply in the market and more of USD would be bought. In the end, the forex bureau will achieve higher returns increasing its demand and hence the USD will gain value over the EUR.
Political and Economic Stability
The more stable the country is, the more the stable is its currency against other world currencies. Political and economic instability causes irregular inflows and outflows.
This creates a market surplus and hence the country’s currency weakens over other global currencies causing a change in the forex exchange rates.
Summary
Fluctuations in the foreign exchange rate are a day to day occurrence. It affects not only the forex traders but also all the people in the affected region or country.
Although these fluctuations are caused by many factors, the major ones discussed above are the most notorious. Proper corrective measures should be implemented for a better and beneficial forex trading world.
