Forex is known as a market for currency trading. People participating in Forex transactions want to earn as much money as possible by currency exchange. Therefore, they need to know the geopolitical situation of countries and their economic conditions because these are two of critical factors which influence exchange rates. What are the main factors which determine the exchange rates?
The general rule says that country with lower inflation level has a currency with higher value because of its purchasing power which is higher comparing to other currencies. In this way, countries with higher inflation can observe some kind of depreciation of their currency relating to their trading partners cash.
Interest rates are strongly associated with inflation which is then related to the exchange rates. Manipulating of interest rates influences the inflation and value of currency. When the interest rates are higher it is possible to gain higher return by investors. This is attractive for foreign capital and makes the exchange rates to be increased. However, this trend can be inhibited when the inflation is higher than in other countries or by some other external factors.
Nowadays, the majority of countries finance their public projects by deficit financing. In this way, public debt is growing. When the debt exceeds the safe zone, the country will be less attractive for foreign investors. Why? High debt is associated with increasing inflation often. As it was said before, it makes the currency value lower, so investors are exposed to a smaller return. When the country situation is really bad, the government can decide to print additional money to pay some part of the debt. However, this mechanism greatly accelerates the inflation growth.
One of the most crucial factors is certainly political situation. External and internal, both have a great impact on forex exchange rates. When the country is at risk of civil war or territorial dispute, investors will never put their money into the project in such country because its internal situation or even existence can be changed in a while. Such states are exposed to severe slump their economic conditions what is associated with a dramatic decrease in currency value.
Current account deficits
The current account is known as the balance of trade of country and its trading partners. It includes payments for services, interest, dividends or payment for goods. The deficit is the situation when the country pays its trading partners more money than it earns. Then, the country must borrow capital from some external sources. In this situation, the country needs more foreign currencies than own money. It makes a higher demand for foreign currency, so the local currency is less valuable.
There are many factors which determine forex exchange rates. People who want to earn money using this trading platform must observe the political situation of the whole World and economic conditions of countries which currency seems to be profitable. Despite the fact that is a hard and long road, spent time will result in a profit.