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Factors than Impact the Rates in Foreign Exchange 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. Forex is indeed becoming very popular, and many people are out to learn some strategies on how to go about it. Forex trading can be quite lucrative for those who understand the tricks of the market. Like with many other things nobody is born great at this. Nevertheless, the old saying, practice makes perfect has made some people great when it comes to trading forex. 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 Rates Inflation is a major factor influencing the fluctuations of currency exchange rates. If a country’s inflation is low, then the value of its currency appreciates. In such a country, the price of goods and services end up increasing at a very slow rate. To the contrary, countries that are experiencing a higher inflation rate typically experience a depreciation in their currency. This then leads to higher rates of interest.
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Rates of Interest
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The value of currency and the dollar exchange rate can be greatly affected by changes in the interest rates. It is also important to note that there is a very high correlation between inflation, interest rates, and forex rates. The increase in interest rates automatically causes currency appreciation which leads to more foreign investment. Such an increase also leads to a rise in the exchange rates. The Political Stability and 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. Such political risks repel foreign investors. Countries that have less political risks are more likely to lure investors. The exchange rates in countries that have stable trade and financial policies will always appreciate this is different when it comes to countries that are unstable politically. 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 is the reason why traders will always seek to know more about political and economic news happening around the world. Trade Terms and Agreements When we talk about terms of trade, it means the ratio of export prices to import prices. Terms of trade improve when a country’s import prices are lower than its export prices. This leads to a higher demand for a country’s currency as a result if the increased revenue.