Currency market, or the foreign exchange market, is almost ten times bigger than all the stock markets of the world combined in respect of net worth and daily/annual turnover. The market trends demonstrate pure competition as practically endless numbers of buyers and sellers participate in the trading and there are no entry or exit barriers. Rate exchange of foreign currencies is almost impossible to predict as the market is highly volatile in nature. If you are new to FX trading, you may find it highly difficult to interpret the current and past trends of the market. However, if you want to make good amount of money without putting much effort and in a legal way, you should start trading in the FX market. Though the algorithmic rules are pretty complex to understand, you can have a brief understanding of how the conversion rate fluctuation to start with. There are four factors that determine currency value appreciation or depreciation.
1. Product prices: If the goods (tangible and intangible) sold in a country are cheap compared to the price of the same in other countries or in the international market, this inversely affects the rate exchange. This is because foreigners will be interested to buy these goods and will need to buy the currencies of the respective nations for buying these goods/services. To put it in a simple manner, the country which offers the products at the cheapest rate will have the strongest currency. This implies that the conversion rate of the currency will appreciate.
2. Government’s economic policies: Countries that have lenient economic policies generally increase currency supply in the international market, which causes depreciation in rate exchange. The countries that have sumptuary economic policies decrease heir currencies’ supply in the international market, leading to appreciation. However, these rates are reciprocally fluctuating and even if your country’s government has lenient monetary policies, you need to assess the economic policies of the other country. Keep in mind that the algorithm of determining the conversion rate of two currencies is highly complex.
3. Differences in rate of inflation: Inflation is a progressive increase in prices of goods and services that also determines the rate exchange in some manner. If the price f the goods (manufactured and sold in a country) increases, the foreigners will prefer not to buy these goods. At the same time, the citizens of the country would look for cheaper options in the international market. This will simultaneously decrease the inflow of foreign currencies to that country and will create a demand for foreign currencies, resulting in depreciation in conversion rate of that particular currency.
4. GDP and GDI changes: If the GDP (Gross Domestic Product) and GDI (Gross Domestic Income) of a nation increases, its capability to purchase imported goods will increase. The rate exchange of the other countries will appreciate depending on the quantity and price of the products that are exported to the country that has experienced a GDP growth.
If you fear that you cannot understand the complex determinants of conversion rate because you have never studies commerce and economic in school, just use an online currency rate calculator before you invest in the FX market.
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