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TheCapitalManager

Which Factors Influence the Exchange Rate?

By TheCapitalManager, in Beginners Forum

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TheCapitalManager    10

TheCapitalManager
Posted

Today, We would be going back to the basics and understanding " How Forex works ?''

 

As you may know any other market demand and supply determine the price of an asset, in this case the asset is the exchange rate between one currency and another currency.

 

Exchange-rate Regime

 

This is valid for a currency regime with free floating rates. The other two main exchange rate regimes are:

 

- the so called pegged float and

- the fixed rate regime

 

Currencies such as the Chinese Yuan are not floating freely as they are allowed only to trade within a limited range around a certain price level (pegged float). It is almost impossible to make money trading a currency like the Yuan which can only be traded in a fixed corridor. Other currencies are fixed completely to the value of another currency and are not tradable independently.

 

Four Main Fundamental Factors

 

If you trade the highly liquid major currency pairs which are available to trade via the Forexchampionship you need to be aware of the fundamental factors which influence the exchange rate between two currencies.

 

The four main factors are:

 

-Inflation

-Monetary policy

-Economic growth

-Interest rates

 

These factors are linked and influence each other. Furthermore the creditworthiness of a country and its status as a reserve currency play an important role.

 

These are the most important fundamental factors which can influence a currency but certainly this list is not “complete”.

 

Other Factors

 

As we have seen lately with the tensions between Russia and Ukraine – geopolitical events can influence currency prices. The immediate reaction of the market after the events in Ukraine over the weekend was to buy the US dollar and the Japanese yen.

 

The USD is still the world’s reserve currency No.1 and the yen is the favorite funding currency in the carry trade. In times of crisis investors seek the “safe haven” of the US dollar and carry trades get unwinded as they are considered risky.

 

Conclusion

 

If you are aware of what’s driving a specific currency fundamentally and if you manage to combine this knowledge with technical analysis you have a good chance to succeed in currency trading.

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