The majority of the general public are aware of fluctuations in the foreign exchange rate, whether they trade forex or not. All people know that different currency values go up and down, but the reason is unknown for most. Basically, if one currency is in demand more than the available supply, then the price is raised and it becomes valuable. However, if the supply is greater than the level of demand, the price will decrease and the currency value reduced. Below are some reasons why the supply and demand of foreign currencies fluctuates at such constant rates.
1. The role of central banks
Central banks also play a role in the fluctuation of exchange rates. These banks use interest rates in adjusting the amounts of money in circulation – the money supply. If interest rates are high, the chance of a loan will be less likely. This is because individuals will not be required to spend as much money as if the interest rates were low. Lower interest rates are often better received by the population as they grow the economy allowing for a higher employment level and domestic product relationships. However, traders tend to trade currencies when the interest rates are high as there is a greater chance of profit during this period.
2. Changes in the foreign exchange rate
When the demand for a particular currency is less than the available supply it means that no trader is interested in that currency. Instead, this means that the trading corporations and investors are trading in currencies other than the one being discussed. However, when the charts show an increase in the demand of a currency, this is due to the increase in trader’s interest or economic outlook on certain interest rates.
The economic outlook is based on various economic indicators including the level of gross domestic product and the employment level. If the domestic product is being paid attention by traders, it is said to be expanding and rates will be raised. If it has lost attention, it will contract and rates will decrease. The employment level is a vital aspect of economic outlook as the barometer of the economy rests on this. Furthermore, it will affect whether people are spending money and contributing to the economy. If people are not working, they will not have money to spend thus a low employment level will result in a negative rating.
It is important to remember that the economic outlook is based on trader’s interest and the population’s behaviour.
3. Foreign exchange rate fluctuations in forex trading
As traders will agree, the forex market exchange rates do fluctuate to a great degree within an overall trend. However, the investors you choose to trade forex will engage in a long-term trade in a particular currency. A speculator will buy and sell different currencies on shorter terms. The supply and demand aspect of the currencies will thus contribute to the fluctuations in exchange rates.