Introduction
The exchange rate refers to the value of the US dollar against the values of currencies of other countries. Such a rate helps determine how much we pay for imported goods and services and how much we receive for what we export, among other things. When the value of the US dollar drops, imports become more expensive, and we tend to reduce the volume of our imports. Simultaneously, other countries will pay LESS for some of our products and that will tend to boost export sales. If imports and exports are a substantial part of a country's economy, as is the case with Canada, the exchange rate plays a particularly important role in our economy. The exchange rate between two countries' currencies is particularly important if the two countries are heavily involved in trade.
What factors affect an exchange rate?
A country's exchange rate is typically affected by the supply and demand for that country's currency in international exchange markets. This is typically known as a floating exchange rate. If demand, for say dollars, exceeds supply, then the value of the dollar will go up. If however, the supply of dollars exceeds demand, then its value will go down. A huge amount of money is bought and sold on international exchange markets for many different currencies.
Several factors influence the supply of, and demand for, a given country's currency.
If INTEREST rates are HIGHER in, say, the US than in other countries, then investors WILL choose to invest in the US, increasing demand for the dollar, provided that the expected rate of inflation is not higher in the US than among our trading partners. If INTEREST rates are LOWER in the US than in other countries, investors will choose NOT to invest in the US, decreasing demand for the dollar.
If the US INFLATION rate is HIGHER, investors are LESS likely to prefer the US -even with higher interest rates- because of the expectation that the value of the dollar will be ERODED by inflation. If our INFLATION rate is LOWER, investors are MORE likely to prefer the US, because there will be NO expectation that the value of the dollar will erode.
Trade balance also has an effect on a country's currency. If world prices for what a country exports rise in comparison with the cost of that country's imports, that country will be earning more for its exports than it pays for its imports. The more demand there will be for that country's currency, the better the deal becomes. If investors are confident that the US economy will be strong, they will be MORE likely to buy American assets, pushing UP the dollar's value. If investors are not so confident that the economy will be strong, they will be LESS likely to buy the country's assets, pushing the dollar's value DOWN.
Joshua Kunken is Chief Currency Analyst for ForeignMarketWatch.com
To trade on the forex market, the largest financial market... Read More
Keen on starting FOREX trading? Why would you not be?... Read More
The first and perhaps most important "secret" is to realize... Read More
During my first year as a local (independent trader) on... Read More
I read on a bulletin board a traders comment that... Read More
Which way will the forex market move? Do you just... Read More
Since the US dollar is the centerpiece of the market,... Read More
Day trading is all about making buy and sell decisions.... Read More
Indeed large multinational and individual banks and other major financial... Read More
A broker is any person or firm that charges a... Read More
If you are reading this article you are probably one... Read More
What Is Commodity Trading?Commodity futures markets allow commercial producers and... Read More
There are many advantages to Trading FOREX as your main... Read More
The essence of the FX2u Forex strategy is that it... Read More
Most traders tend to concentrate on pinpointing the perfect entry... Read More
With every passing year the interest in electronic trading is... Read More
FOREX is the world's largest and most liquid trading market.... Read More
A Forex broker is a broker dealing in foreign exchange,... Read More
Do you think adaptation to the realities of the market... Read More
Many Americans are interested in getting involved in forex trading.... Read More
It is possible to buy and sell money from different... Read More
Forex trading online is a fast way to use your... Read More
Forex, or Foreign Exchange, is the simultaneous exchange of one... Read More
To make a profit, in the FOREX, a trader can... Read More
The foreign exchange currency market is the largest market in... Read More
FOREX is the abbreviation for the Foreign Exchange market. FOREX... Read More
There is an old saying that the market is driven... Read More
The following are some of the most common types of... Read More
Have you noticed that when someone's trying to sell you... Read More
The recent upheavals in the world financial markets were quelled... Read More
The psychological aspect of trading is usually underestimated by those... Read More
Are you looking into a career in day trading? In... Read More
You may be asking yourself "how does one begin to... Read More
The first and perhaps most important "secret" is to realize... Read More
Currencies are traded in dollar amounts called "lots". One lot... Read More
FOREX is the world's largest and most liquid trading market.... Read More
The essence of the FX2u Forex strategy is that it... Read More
The recent upheavals in the world financial markets were quelled... Read More
The investor in the currency market takes for granted that... Read More
Over the past several years, the popularity of online currency... Read More
IntroductionThe exchange rate refers to the value of the US... Read More
A broker is any person or firm that charges a... Read More
There are lot's of Forex signals providers out there. New... Read More
Forex trading online is a fast way to use your... Read More
ISO 4217 is an international standard describing three letter codes... Read More
There are some common mistakes I've seen traders make in... Read More
Most new traders tend to focus just about all their... Read More
For those unfamiliar with the term, FOREX (FOReign EXchange market),... Read More
Foreign exchange trading is the trading of currencies. Most currencies... Read More
Indeed large multinational and individual banks and other major financial... Read More
A Forex broker is a broker dealing in foreign exchange,... Read More
Are you looking into a career in day trading? In... Read More
Currencies are traded in dollar amounts called "lots". At 100:1... Read More
International commerce has rapidly increased as the internet has provided... Read More
An online forex broker is a firm that facilitates retail... Read More
To make a profit, in the FOREX, a trader can... Read More
Have you heard the wise saying that a trader who... Read More
What Is Commodity Trading?Commodity futures markets allow commercial producers and... Read More
The Foreign Exchange Market ? better known as FOREX -... Read More
Cut your losses short and let your profits run. This... Read More
A Minister of Finance is morally right to lie about... Read More
What is Options Trading?An option is simply granting someone the... Read More
With every passing year the interest in electronic trading is... Read More
Below I will describe three basic principles that may come... Read More
Consider the following: As a trader you are in a... Read More
What are Forex signals? Forex signals are paid services offered... Read More
Currency Trading |