Factors affecting currency exchange rates

Here are factors that affect currency exchange rates:

Bank Rates Supply and Demand

Currency can be bought and sold just like stocks, bonds, or other investments. And just like these other investments and almost anything else you can buy or sell – supply and demand influences price. Supply and demand? One of the most basic economic principles but nevertheless can serve as a good starting point to understand why currency exchange rates fluctuate.

Bank Rates and Political Stability

Currency is issued by governments. In order for a currency to retain its value (or even exist at all) the government which backs it has to be strong. Countries with uncertain futures. (due to revolutions, war or other factors) usually, have much weaker currencies. Currency traders don’t want to risk losing their investment and so will invest elsewhere. With little demand for the currency the price drops.

Bank Rates Economic Strength

Economic uncertainty is as big of a factor as political instability. A currency backed by a stable government isn’t likely to be strong if the economy is in the toilet. Worse, a lagging economy may have a difficult time attracting investors, and without investment, the economy will suffer even more. Currency traders know this so they will avoid buying a currency backed by a weak economy. Again, this causes demand and value to drop.

What about best bank rates:

If a country has a trade deficit, the value of their imports is greater than the value of their exports. A trade surplus occurs when the value of exports exceeds the value of imports.

When a country has a trade deficit it needs to acquire more foreign currency than it receives through trade. For example, if Canada had a trade deficit of $100 to the US, it would have to acquired $100 in American currency to pay for the extra goods. 

What is more, a country with a trade deficit will also be over-supplying other countries with their own currency. The US now has an extra $100 CND that it does not need.

Basic supply and demand dictate that a trade deficit will lead to lower exchange rates and a trade surplus will lead to a stronger exchange rate. If Canada had a $100 trade deficit with the US then Canadian demand for USD would be high. But the US would also have an extra $100 Canadian so their demand for CAD would be low, due to excess supply of Bank Foreign Exchange Rates.

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