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Factors That Affect the Changes in Currency Exchange Rates It is very important for businesses, investors, currency traders, and vacationers to understand how currency exchange rates work. There are some factors that influence the fluctuations of currency exchange rates, but what are they? Some of the things that really affects the changes in the currency exchange rates are stated below. Supply and demand comes on top of the list. Currency can simply be bought just like other investments, stocks, or bonds. And like other investments, currency price is also affected by its supply and demand in the market. The law of supply and demand is the principal thing in economics and it comes very basic for us all but it will always be the best starting point to learn about how currency exchange rate works. Second is the political stability. The country’s government is in charge in issuing the currency. A country’s government which backs its own currency must be stable and strong in order for its currency to strive and most of all, for it to exist. Wars, revolutions and other factors affect the countries course in the future which also affects how strong or weak their currency is. It is because, currency traders will not risk investing in weak and unstable countries that is why they choose the stronger and more stable ones. The decrease in its demand also affect its price, also lowering it.
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Thirdly, it is the economic strength. Economic strength comes toe to toe with political stability, in terms of how critical it is. If the country’s economic status is dead or in a very deep economic hole, then even its government strength will not matter. A country who cannot find investors due to its lagging economy are probably having an economic meltdown because with no investors, there is also no way to save its current economy. Economic stature will not attract currency traders because they value their investments too much to risk it in a country which won’t be able to provide a high guarantee of protection in their investments. The value of a currency in the market and how strong it is is usually the product of having a strong and stable economy. Currency traders are usually monitoring closely the GDP, employment rates and other economic factors of a country to choose whether to invest or not.
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Inflation falls fourth on the list that affects the fluctuations in the currency exchange rates. The higher the inflation in the country is, the lower the value of the currency is, while the lower the inflation rate in the country is the higher the value of the country’s currency is.