The most important factor that determines the value of any commodity is its ratio of demand and supply. The same goes for currency trading in forex. If the demand of a currency is more then its value will be high otherwise that will be low. In forex demand and supply is measured relatively. By relatively we mean that how well a particular currency is doing with respect to some other currency. Now the factors that affect the demand and supply of a currency are what we’ll discuss in this article.
Economic situation and monitory policies
The central banks can influence the exchange rates by entering in forex market and implementing some effective monitory policies. It is done by buying or selling large chunks of domestic currency. This way the domestic currency is set at an ideal level. The economic conditions of a country can also influence the sentiments of traders and their judgement can also influence the exchange rate.
Geo - politcal events
The political happenings of a country can influence the exchange rate in many ways. It is generally observed that the exchange rate of a currency is directly related to domestic political stability. Some examples can be used here to further make the point clear. During the Kosovo war, the Euro fell about 10% against USD due to the downward pressure of the war on Euro.
Payment clearances
The burgeoning current account deficit (CAD) is the biggest cause of concern for any under performing currency. The balance of payment has a direct relation with supply and demand of currency. The demand of foreign currency increases and its supply is limited, so the domestic currency descends and the foreign currency ascends.
Interest rates
The fluctuation in key interest rates of a country directly affects the selling or buying power of its currency. If the interest rates of a currency are higher than some other currency, more people will buy the currency with higher interest. This will subsequently increase the demand of that currency and as a result its value will increase too.
Market judgment
Sometimes the forex market can show completely unpredictable events. This proves that other than technical aspects emotions, judgments and perception about a country also affects the exchange rate. The judgements about a country are made even before the data about interest rates, balance of payments are made available to the public. Also when the actual situation is very different from the perceive image of a country, there are huge fluctuations in the exchange rates.
Speculation
The major market operators too determine the course of movement of exchange rate by speculating about the currency. These large operators buy or sell large amount of currency which sends a particular signal among traders and they follow suit. It turns out being a self-fulfilling prophecy. If the market expects a rise in value of a certain currency, people will start buying it and it will gain value, otherwise, if they expect it to lose value they will start selling it and the currency will depreciate.
