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Factors That Influence Foreign Exchange Rates Foreign exchange is quite a fascinating concept. Lots of people are continually becoming more and more fascinated by this relatively new method of trade that occurs online. The method of trade is interestingly gaining momentum and quite a handful of people are interested in learning how it works. Forex is very lucrative to those who understand the intricacies of the markets. None is born with trading skills, just as it is with many other things. However, there are people that have been at it for a good amount of time and practice has made them perfect. This doesn’t mean they never make losses. However, having mastered the variables that influence forex, they are better situated to succeed at this type of activity. Below are some of the influencing factors in foreign exchange. Inflation In most cases currency exchange rates fluctuate as a result of inflation. When a country is experiencing low inflation, the value of its currency appreciates. Within such an environment the prices of commodities tend to increase quite slowly. To the contrary, countries that are experiencing a higher inflation rate typically experience a depreciation in their currency. This in turn leads to higher interest rates.
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Interest Rates
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When the interest rates change, they may lead to a change in the value of currency and the dollar exchange rate. In addition to this, a very strong connection also exists between interest rates, inflation and forex rates. The increase in interest rates automatically causes currency appreciation which leads to more foreign investment. As a result of the increase, the exchange rates also go up significantly. Political Stability and an Increased Economic Performance The political state in a country and its economic performance can greatly affect a country’s currency. Foreign investors are attracted to a country with less risk of political turmoil. These risks draw away investments from countries. Countries that have less political risks are more likely to lure investors. Political instability in some countries results in depreciation in exchange rates and for those countries that are more stable they tend to have strong trade and financial policies that facilitate the appreciation in exchange rates. Nonetheless, countries that are considered superpowers with a more stable economic performance can have a great influence on the trading markets depending on their political state. This explains why traders need to be constantly updated on the different political atmospheres in different countries. Terms of Trade Trade terms basically refer to the ratio of import and export prices. Terms of trade improve when a country’s import prices are lower than its export prices. This causes a higher demand for the county’s currency due to increased revenue.