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What Makes Forex Rates Move?

The value of currencies around the world fluctuates now and then due to various forces that affect it. As they fluctuate the exchange or interest rates follow suit and our forex investments are affected. This is because forex rates are the price with which we exchange various currencies with, and profit or lose in the process.

The various forces that affect currencies and their forex rates are economic development, political stability, mass unrest, unemployment, labor, real estate, national debt of the currency host country, trade gains or deficits, gold and oil price fluctuations, and many others. Sometimes, even climate change can be a factor.

The gross domestic product, or GDP, of the host country of a currency is also a factor. If the GDP is too slow grinding general unrest may soon pester that country, eventually triggering trade shortfalls or deficit. This would later translate to the currency's weakness against other currencies and, later forex rates would change. This process can sometimes happen in a blink of an eye.

Let's look at oil prices, for instance. When the world market decides to up the value or price of oil, oil net exporter countries will definitely have their currencies also increasing in strength. Thus, the accompanying change in forex rates. Net exporter countries dealing in major world exports like oil often have their currencies strong.

However, if a country is a net exporter of a minor or non-essential world export like handicrafts or a certain food item, its currency is just slightly affected and no major currency strengthening happens to effect a major change in forex rates. Thus, to have a powerful move in forex rates in a country's favor there must also be a major shift in industries. Net exporters of oil will always have a strong currency compared to net exporters of handicrafts.

Trade deficit being among the major influences in the strength of a currency, and therefore of forex rates, we need to know more about balance of trade. When a country has too many imports than its exports then there's an imbalance of trade which results to a weak currency. A country may have strong exports of a commodity and strong import of another one. So we should refer to the total or overall exports.

Forex rates depend on the strength of currencies. And the strength of currencies depends on what affects the economy of their host countries. Hence, trade is always the key. Whether there is political or economic instability, everything results to an affected trade.


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