Why do Currency Rates Change?

If you look at the stock market trading where there are always supplies and demands….you will begin to understand how currency exchange works. Same applies to this very principle, there is a buy & sell ratio in trading currencies. However, a lot of factor can influence the money market rates, but the primary factor to look at will be the demands for a particular currency.

Let’s just assume for a moment that you’re an importer of Japanese sports cars. Obviously, you are going to transfer your funds oversea and before the exporter of your automobiles cash in on your funds. It gets converted into Japanese Yen and what this means is there is a demand for the Yens. As an importer, you are increasing the strength of the Japan Money Market, which also plays a significant role in their dollar value.

When you trade in stock exchange, you look at a number of factors inside the company structure. If the demand for the share rises, the selling price of the share also increases because investors can see a lot of future in this company. Same applies in Foreign Exchange Rates, you treat each country like an individual entreprize, hence determining the economic growth and future of their dollars.

There are a number of key factors to look at in currency trading:

1) Interest Rate – The rise and falls of interest rates plays a significant role in the economic cycle. This can be an increase in mortagage interest and also interest earn from investments. Because the rise on interest rate attracts foreign investors to put money into the country. This will strengthen the currency rate as more demands are required in the dollars.

2) Oil Price – The oil prices is probably one of the most neglected factor which affects currency rates. A perfect example to look at will be Canada and Japan. Since Canada is one of the biggest exporter of oil and the primary crude oil supplier for Japan. The increase in oil prices will strengthen the dollar value of the Canadians, this also means it’s going to cost more for the Japanese to buy their oils…hence leaving more Yens overseas.

3) Unemployment Rate – The more this statistic rises, it means that more people are out of jobs, hence affecting the way family spends. Less money are being cycle around which will weaken the economy. What will this do to the currency value though….yes!

4) Stock Exchange Market – People who are trading in the stock market knows the affects it could place on the economy and the currency alltogether. If you look at Hong Kong back in 1997, the major fall led to an economic breakdown and a lot of people are also bankrupted because of this.

While these are some of the main points to consider to determine the price of a particular currency. Many smaller factors can also affect the way investor determines the trend of the Forex Market. For example, a new government policy restricting all import trades from a particular country…..think of what this news will do to eager traders and the changes it will do to the currency rates.