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Factors That Affect the Changes in Currency Exchange Rates

Businesses, investors, currency traders, and people who wanna go on vacations need to know how currency exchange rates function because it is very critical to their work and lifestyles. What are the things that affect the changes in currency exchange rates? Some of the things that really affects the changes in the currency exchange rates are stated below.

Supply and demand comes on top of the list. Currency can simply be bought just like other investments, stocks, or bonds. And like other investments, currency price is also affected by its supply and demand in the market. Very basic as it seems but, the law of supply and demand will always be a critical and great first step in taking course in understanding how currency exchange functions.

Political stability comes second on the list on things that affect the currency exchange rates. Governments issue the currency in the country. In order for a country’s currency to exist or survive, the country’s government which is backing it must be strong and stable. Basically, countries which have more wars, revolutions or conflicts tend to have a hazy future ahead of them, which also basically means, their currency will be weaker. Stronger and more stable countries tend to provide more protection to currency traders’ investments that is why currency traders choose them over weaker and more conflict prone countries. The decrease in its demand also affect its price, also lowering it.
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Third factor is Economic strength. The uncertainty in economic status is very critical just as how critical political stability is. If the country’s economic status is dead or in a very deep economic hole, then even its government strength will not matter. A country who cannot find investors due to its lagging economy are probably having an economic meltdown because with no investors, there is also no way to save its current economy. Economic stature will not attract currency traders because they value their investments too much to risk it in a country which won’t be able to provide a high guarantee of protection in their investments. A strong currency is usually the product of a strong and stable economy. That explains why GDP, employment rates, and other economic factors are very critical and are widely monitored by currency traders.
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Fourth factor is Inflation. The higher the inflation in the country is, the lower the value of the currency is, while the lower the inflation rate in the country is the higher the value of the country’s currency is.