Factors governing Foreign Exchange Rates

Foreign exchange market, also known as FX or forex, is the largest market in the world. Fluctuation of foreign exchange rates is the most important parameter in forex market. Foreign exchange rates play a major role in a country’s level of trade, which is critical to all free market economy in the world. Exchange rate shows the country’s level in regard to economic health thus foreign exchange rates are most watched economic measures. We will see several important factors which influences the foreign exchange rates.

However, before we see these factors we need to get a brief idea that how fluctuations in foreign exchange rates affect the trading relationship between two nations. If your country’s exchange rate is higher than currency exchange rate of relative country, your exports will be more expensive and imports will be cheaper in the forex market. Viceversa lower currency exchange rate makes your country’s exports cheaper and its imports more expensive in forex market. Higher currency exchange rate lowers nation’s trade-balance and lower currency exchange rate increases it. Read more..