To the extent that the exchange rate directly impacts the economic growth of a country, it is the object of increased surveillance of various political and monetary authorities. On a smaller scale, the exchange rate also affects the investors who hold assets in foreign currency (share, forex or commodity).
The interest rate
The interest rates are a tool of monetary policy of major central banks. Their levels are set as a function of economic activity and inflation. Generally, when growth is low, the monetary authorities lowered their rates to revive growth and encourage investment. On the other hand, they increase when there is a risk of overheating of the economy or that the inflation is too high. On the forex, the currency with a high interest rate that have become popular with investors especially among carry traders who earn their living on the interest rate differential that exists between the pairs traded.
The economic growth
The economic growth reveals the good health of an economy. This means that the economic indicators recorded in the territory are green. The more a country’s growth is strong, more investors want to invest, in purchasing, for example, currencies. Logically, the currency of the country appreciates on the market. You will notice the correlation between these first two factors.
The status of the currency
On the forex, all currencies do not have the same status. The u.s. dollar is, for example, a value called refuge, which means that in the event of a crisis, investors are falling back on this kind of currency, more secure. It is not the only one, the euro, the pound, the japanese yen, australian dollars and new zealand and the swiss franc are also. In a period of calm, global investors tend to trade forex more risky (pairs exotic, minor).
The events geopolitical
The exchange rate is also influenced by the various events in the geopolitical world. For example, the Greek crisis has considerably weighed on the euro. These are events that are especially difficult to anticipate and which lead to sometimes unexpected results on the financial markets such as the attacks of September 11, 2001.
So much for the first four factors that influence the exchange rates of global currencies. Tomorrow, we will review the others are inflation, monetary policy, public debt and the current account balance.