During the last two years, a lot has changed in the forex market. The US dollar is becoming stronger, while the currencies of the developing countries are moving downward. The investors are once again looking at the American money as their safest alternative. Several factors have the potential to fluctuate the currency exchange rate. So, investors need to carefully analyze the following to make sure all the bets win something.
Supply and demand for the money
It is evident that the value of any given currency would go up if its demand increases. Supply and demand for the money can easily get affected due to problems in the economy, natural catastrophe, a big event, or war like situation.
Take the impact of Brexit on sterling and Euro as an example. Both currencies experienced a slump in their value immediately after the Brexit vote in June 2016. British pound even became weaker after tabling of the exit deal agreement in the Parliament. Such an event indicates the possible hurdles in the region’s economic activities during the next few years. Traders started selling the lesser attractive Euro as well as the pound, resulting in lower demand, more supply, and even lesser exchange rate.
Political twists and turns
Along with the stock markets, the political twists and turns in any country can also influence the nation’s currency. Take the impact of Trump’s victory on the US dollar as an example.
Donald Trump had promised tax cuts and an increase in the country’s spending on infrastructure during his election campaign. His victory indicated the possibility of an increase in growth rate due to new projects. The American dollar’s value has considerably increased since Trump took over as the president. Good GDP figures, economic growth, and multiple new oil and gas sites becoming operational also aided the dollar to gain further. Plus, Brexit worries pushed more investors to sell ponds and buy dollars resulting in more demand.
Influence of other currencies
The value of a nation’s money is often measured against another country’s currency. For example, the cost of British pound or Indian rupees would be calculated in the US dollar. A rise in the value of dollars would automatically negatively impact the pound and rupee. During the last three years, the currencies of developing countries like India, Turkey, Brazil, etc. have fallen considerably. According to economists, one of the main reason behind this fall is the strengthening US dollar.
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The Trump effect
Even a kid studying in junior high would be able to point out that the American President Donald Trump’s tweets can keep any country’s currency soaring for weeks or get it plummeting down within minutes.
Trump tweeted about difficulties in trade between Washington and London after the UK’s exit recently. The effect of Trump’s tweet was visible on sterling within hours. The British currency lost its value even further.
Dollar’s value increased when the American President talked about imposing 15 percent more tariffs on Chinese imports in October. The possibility of a trade conflict arising out of the US’s tariffs war and Brexit is another factor behind investors’ decision to bet on the safer dollar.
The Oil effect
More than $4.2 billion worth of oil is consumed by countries from around the world each day.
Every nation depends on oil, and it has become a necessity. Thus, the rates for oil cause a significant impact on almost every country’s economy. Most developing nations happen to be the net importers of crude.
When the crude prices tumble in the oil market, OPEC and oil exporting nations suffer. On the other hand, developing countries suffer when the prices start moving upward.
Crashing oil prices also take down the value of currencies that belong to oil exporting nations. Back in 2014, when oil prices witnessed a significant crash, the Russian ruble lost 40 percent of its value. Forex investors must carefully watch the oil demand and supply situation before betting on any currency.
Country’s interest rate
The most prominent factor that can influence any nation’s currency is the interest rates that are adjusted by the central bank. This rate determines the interest charged by banks to borrowers. Whenever the central bank reduces the interest rate, more money comes into the country’s economy. But it also reduces the value of the nation’s currency.
Investors always opt to buy currencies of countries where the central bank’s interest rates are high because higher rate ensures an additional rate of return while selling the money.
Check the current account deficit
Every nation has trading partners for its exports and imports. The gap between the nation’s imports and exports is referred to as the current account deficit. Developing countries that import more and export less are often forced to borrow money from foreign countries to pay up for the shortfall. The value of the currencies of such nations does not increase quickly due to lesser demand.
Corruption and ease of doing business
Rampant corruption, scams, and too much of red tape can have long-term consequences on the country’s economy. Allegations of fraud against the ruling party politicians indicate a possible regime change. Even the World Bank rankings for ease of doing business might prove wrong at times. But referring to local news from the country can help you judge the situation. Usually, investors often avoid betting on money from states that make it in the headlines due to scams as a precautionary measure.
Deficit and debt trap
To stimulate the domestic economy, some governments often start spending handsomely on public sector projects. They even borrow money from foreign countries. Unfortunately, this results in debt and budgetary deficits for the government. Investors prefer to stay away from such nations because their chances of defaulting on payments are often high. One must check the debt rating given to such a country before investing in their currency.