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What drives currencies

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Interest rates

  • The monetary policy is situated by Central Bank-Government-Nations realize that manipulating currencies does not work
  • A benchmark interest rate is set via market operations.
  • The difference between yields paid across currencies in part governs the appeal of each.

Inflation

  • Rising prices wear down growth-it builds an illusion of faster growth

  • Falling prices are not good for an economy-it’s difficult to prevent loss of confidence

  • Concept of real interest rates (Nominal interest rate minus rate of inflation)

Growth

  • Gross domestic products measure a country’s production.

  • Depending on their risk appetite some investors seek rapid growth.

  • It keeps currency demand floating.

  • Countries that grow strongest tend to have a firmer currency

  • It identifies a lot about export and import demand 

Employment

  • Rising employment is a sign of economic health

  • Utilization accounts for 70% of US economy

  • Wages are a key sign of growth trend

Other factors affecting the price fluctuation

Central bank bias

  • Visit the official websites of central banks and read the notes of recent meetings

  • These policy meetings directly address these issues and give out key metrics and hints as to what the next move might be

  • You will hear individual bank members deliver speeches supporting these views

  • Currency markets tend to trade numerous moves ahead and reward currencies supported by increasing rates. 

Trade deficit

  • Goods in – goods out generates a trade balance

  • Too high imports creates an exodus of capital, which is bad for a currency

  • To high imports can create domestic demand constraints and encourage inflation

  • Investors punish nations with too high deficit since that currency needs to become less attractive to allow exports to compete

  • Deficits habitually do not last forever