How are currency prices determined?
Determining currency prices is a very complex procedure because of many different factors which affect the value. Some of these factors may even be specific to particular countries, which makes determining the price of its currency even more demanding. However, some general rules do exist and we will go over them in this article. To put it in very simple terms, currency prices depend on supply and demand, two market forces which are heavily influenced by economic policies of a country. Some of the most important aspects of these policies will be explained by our experts in the rest of this article. Keep reading to learn more.
How are currency prices determined? | Market influences
If the market is not stable, investors will try to find a currency that allows them to preserve the value of their funds. These currencies are usually USD, gold or something along those lines, i.e. a currency which is not prone to changes. At the same time, speculators’ Forex Trading Strategy is to profit from this instability by buying or selling specific currencies, which further affects their supply or demand. Apart from these two factors, currency prices are also affected by a country’s export and import results. As a matter of fact, economy and inflation are inversely correlated – when one rises, the other is sure to fall. If a country has to import goods, it has to pay for them is some foreign currency, meaning that the demand for their own currency is dropping. That’s why production of goods in a country is so important – it keeps currencies strong.
How are currency prices determined? | Government influences
Governments can also influence currency prices with their decisions or their inability to cover their expenses. When the latter scenario happens, public debt rises and the government has to borrow money, thus weakening their own currency. Another example of government influencing currency prices are the interest rates on the government bonds, something you want to look out for if you’re into Currency Carry Trades. Depending on how high they are, they might attract more or less foreign investors to a country and help its currency gain strength. However, should a currency ever become too volatile, a country’s central bank can intervene in order to quell the situation. This institution can buy or sell large amounts of currencies and by doing so stabilize the currency prices.
How are currency prices determined? | Conclusion
In conclusion, it is safe to say that currency prices mainly depend on a country’s political stability and consistent economic policies. If these two conditions exist, you have a stable currency upon which you can always rely in your trades. However, don’t take it for granted. As we have already said, the formation of currency prices is a very complex issue, with a whole lot of different factors which have a role to play in the process. What we went through here are just the basics and there is still a lot more to learn if you want to become a financial expert. But even with these simple advices, one can make a very decent profit on the market.