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    5 Factors Affecting Forex

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    Azrah

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    5 Factors Affecting Forex

    Uploaded by

    Azrah
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    5 factors affecting forex

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    5 Factors Affecting Forex

    Uploaded by

    Azrah

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 1

    DISCUSS FIVE (5) FACTORS AFFECTING FOREX BY GIVING SPECIFIC EXAMPLES.

    The first factor that affecting forex is inflation. The rate at which the general level of
    prices for goods and services is rising is known as the inflation rate. If, for example, inflation
    were lower in the UK, the purchasing power of the Pound Sterling would increase relative to
    other currencies. UK exports become more competitive and the demand to purchase Pound
    Sterling for UK goods will increase. Higher interest rates usually follow. Countries therefore
    with lower inflation rates will tend to see an appreciation in the value of their currency.
    Furthermore, the second factor that affecting forex is interest rates. There is also a
    high correlation between inflation, interest rates and exchange rates. Depositing money is the
    US for example becomes more attractive if US interest rates rise relative to other countries.
    By saving in US banks, a better rate of return will cause the demand for the dollar to rise.
    Central banks also can influence inflation and currency exchange rates by manipulating
    interest rates. If however the inflation rate is mush higher in the US than in other countries,
    then, higher interest rates will have little impact in an appreciation of the dollar.
    Moreover, the third factor that affecting the forex is speculation. Political events or
    changes in commodity prices may cause a currency to fall in value. If speculators believe the
    Euro will fall, they will sell now for a currency they feel will rise in value. For this reason,
    sentiments in the financial markets can heavily influence foreign exchange rates. If the
    markets are alerted to the possibility of an interest rate increase in the Eurozone, we are
    more likely to see a rise in the valuation of the Euro as a result. Because a government’s
    reserve of foreign currency is quite low compared to daily turnover in the market, the power
    of speculators is quite significant in exchange rate influence. For example, if markets see
    news which makes an interest rate increase more likely, the value of the pound will probably
    rise in anticipation. The fall in the value of the pound was partly related to the concerns that
    the UK would no longer attract as many capital flows outside the single currency.
    The next factor that affecting the forex is balance of payments or current account
    deficit. If the value of imports is greater than the value of exports, this means there is a deficit
    in the current account. This deficit is a result of more spend on foreign goods and services by
    a given country than it is earning, and borrowing from foreign sources to make up the deficit
    is usually a feature. A lack of capital in flow to finance a current account deficit will inevitably
    lead to depreciation in the currency.
    The last factor that affecting forex is public debt. A country’s debt rating is also a
    factor which has influence over its currency exchange rate. Public sector projects sometimes
    require large scale deficit financing which boosts the domestic economy. However, foreign
    investors are less likely to invest in countries with large public deficits and government debt.
    Fear of a debt default can result in the selling of bonds denominated in that currency by
    investors, resulting in a fall in the value of the exchange rate. Goverments may also need to
    print money to pay parts of a large debt, resulting in inflation. For example, if markets feared
    the US would default on its debt, foreign investors would sell their holdings of US bonds. This
    would cause a fall in the value of the dollar.

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