Why Currency Changes?
February 5th, 2010 by Mike WongMany of you may be interested in forex trading or related investments. Many people like forex because they think it an easy investment compared to stocks. Unfortunately, many of you lose money in that sense as well. To gain your first million from investment, you should prepare yourself well in such direction. Let us understand more about currencies.
Actually, there are a lot of factors affecting the currency fluctuation. Generally speaking, changes in economic position and the macroeconomics policies are the underlying factors for the long term currency trend. You can always notice that analysts are very concerned about certain economic indices like GNP (gross national product), consumer index and changes in interest rate, etc. By knowing these economic indices, we are more capable to find out the currency fluctuation trend. Invest in and withdraw from the forex trading market more actively.
International profits significantly affect the currency trend. International profits are the net amount of income and expenses on foreign economic activities. Under normal circumstances, trade deficit indicates that the demand exceeds the supply for the foreign currency/trade/imports. Under the floating rate system, market demand and supply determine the currency fluctuation. A trade deficit can cause the depreciation of local currency while appreciation of foreign currency, vice versa.
Other than the foreign income and expense, you can also look at the national income. National income means the people's income in the nation. The fact is that, when people are earning more, they are likely to spend more. When they spend more, the demand of local currency increases. Like what we have talked above, the demand of the local currency drives the appreciation of it.
Even though you see that people's income is increasing, it does not necessarily mean that the local currency must appreciate. You have to understand the real factor that drives the increase in people's income. For example, if the increase in income is driven by a series of government policies or demand, you may not see the appreciation of local currency. Why? Usually the government demand is so big that additional foreign imports are required. In this case, the demand on foreign imports or foreign currencies induces appreciations of foreign currencies.
Inflation can also cause the currency to fluctuate. If there is a significant amount of free cash (in local currency) flows in the market, the demand (to buy products) of such currency is likely to be less than the supply. Inflation occurs in this case. When inflation happens, the product price start to increase and the purchasing power start to decrease. In turn, lower demand of local currency for internal consumption cause the local currency to depreciate.
We have basically talked about the very fundamental factors for currency fluctuation. Of course, there are still many factors that can affect such changes. You are always recommended to explore more before actually entering into the forex trading investment.
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