Factors affecting the Forex market

The Forex market across the world is affected by numerous factors. Incredible as it may seem, a storm in the eastern part of the world could affect the currency of a western country! Any impact on a currency will in turn affect the Forex market. By closely observing these factors through out the world, players can predict Forex market conditions and can potentially reap huge benefits!

Broadly, politics, balance of trade and investment, inflation, country wide policy decisions, interest rates, real estate and weather could affect the Forex market. There are of course many more factors that could variously affect the Forex markets.

Government policy decisions set the trend for upward or downward movement of the country’s currency. Having consistent policies will make investors confident, there by giving the currency a boost. If a country has a lot of debt, then foreign investors are going to be reluctant about their investments, which in turn will have a negative effect on the currency. Similarly, wars or terrorist attacks create an atmosphere of uncertainty, which also affects currency strength in the Forex market.

When there is unrest in a country, investors tend to look at other countries as investment options. In such a scenario, the currency will weaken. As opposed to this, a stable country can have a fairly strong currency. When some countries’ economies are growing rapidly, those countries attract more investments – hence their currencies could become stronger.

The difference between imports and exports is known as “Balance of trade” and it is one of the most important factors to determine the strength of a currency. If a country has a trade deficit that is, imports more than what it exports, it gives rise to an uncertain economy which in turns weakens the country’s currency in the Forex market. If imported items are going to cost less as compared to locally available items, the trade deficit is likely to shoot up, if there is no cap to imports.

Weather actually plays an active role in the Forex market. Agriculture and energy consumption, which are dependant on weather will determine a country’s imports and exports and in turn its economy which in turn, affects its currency strength.

We have to remember one thing though – all these factors are not mutually exclusive – they don’t impact the Forex market independently but together, have an impact on currency strength and hence the Forex market. Also, the same factor could affect one currency adversely while impacting another currency favourably.

This entry was posted on Wednesday, June 25th, 2008 at 6:10 pm and is filed under Forex. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.