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Foreign Exchange Rates and What Shapes Them

Foreign Exchange Rates Gold Bars and Coins

When you trade on the forex market you have to know about foreign exchange rates and the factors that shape them.  If you do not pay attention to what affects the foreign exchange rates then you will not know when the market will change.  It is important that you know as many factors as possible and which way they could swing the market.

The Foreign Exchange Rates Supply and Demand

The trade concept of supply and demand can be related to the foreign exchange rates.  If a currency is in high demand then the value will increase.  However, if the demand for the currency is low then the rate will decrease.  The supply and demand related to consumer spending will also affect the overall currency rates.

The economy will also play a large role in the foreign exchange rates.  If a countries economy is doing well the rate will increase.  If the economy is doing badly then the rate will decrease.  At times like this it is possible that the government will take steps to control the rate.

Consumer spending which affects the supply and demand on the currency is affected by a number of factors as well.  Some of these factors include:

  • Government incentives
  • The interest rate of the country
  • The rate of employment
  • The inflation rate in the country

If you are trading on the forex market then you will want to keep an eye on these factors.  These factors will affect the market thus affecting your trading and the money you make.

What The Central Banks Are Doing

The interest rates of all the major currencies are actually quite low and this is something that does not look set to change.  These low interest rates are causing the central banks in these countries to take steps that would generally not be taken.  Many governments have taken to using quantities easing methods to increase the money supply in the country and the economy.  This means that the government is buying bonds from financial institutes in order to increase liquidity.  This is generally seen as a last resort in trying to boost an economy.  The normal method which would be used before this is the lowering of interest rates.  The reason for this is the number of risks involved in this plan.  The main risk is that the increase in money can devalue the currency as there is too much of it.

What About Employment Figures?

Economic growth is affected immediately and directly by the level of employment within a country.  If there are high levels of unemployment the economic growth will slow down.  This is due to the restriction to consumer spending.  When people do not have jobs they do not have money to spend and the people who do have jobs will save more and spend less.  The lack of spending causes the economy to slow as there is no flow in the currency.  The effect of this will be that the currency of the country will weaken in relation to other currencies.  This weakening of the currency affects the foreign exchange rates.

 

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