The information presented here is for Forex/Currency traders. This information is also useful for anyone who wants to understand the factors that determine the value of the currency. For a currency trader, this understanding is necessary to develop an analysis of currency trends for a particular country. Identifying accurate currency trends is the key to successful Forex trading.
What determines the value of a country’s currency actually depends on the supply and demand for that currency. When a certain currency of a country is in high demand from buyers such as travelers, governments and investors, it increases the value of the country’s currency. The following factors can have a positive or negative impact on the demand for a particular currency. Let’s look at these factors.
1) Currency printing:
If a country prints an excessive amount of currency, more than usual, it can reduce the value of the currency. Every time you have more than something, it can reduce its value. This is true if you are talking about currencies or commodities such as iron ore, crude oil, coal, gold, silver and platinum. A large amount of currency in circulation can reduce the value of the currency. A small amount of currency in circulation can add value to the currency.
2) Current state of the economy:
If the country’s economy is not in order, it can reduce the demand for the currency of that country. In particular, we are talking about the unemployment rate, the level of consumer spending and the pace of business expansion taking place in the country. High unemployment, lower consumer spending, along with less business expansion mean a poor economy and a lower currency.
It is also necessary to take into account the potential of the country’s economic growth. If the potential is great, the value of its currency should increase. In addition, if a country produces goods that other countries want to buy, it can increase the value of that country’s currency.
3) The price of foreign goods:
Prices for foreign goods are tied to the economy. If a foreign company sells goods in the country that are cheaper than comparable goods produced in that country, it could be detrimental to that country’s economy. A bad economy leads to a decrease in demand for the currency of this country, which reduces its value.
4) The political circumstances of the country:
To what extent is there political corruption in the country? How do political affairs affect the economy of this country? In a country where corrupt politicians are known, the value of its currency may fall.
5) What a mysterious country:
A country that trades with a high level of secrecy, at least as noted by those outside the country, can lead to a fall in the value of its currency. In other words, if little is known about the country because of media restrictions in this country, it can reduce the value of its currency.
6) The national debt of the country:
How well do politicians solve the sovereign debt problem? Are politicians causing an increase in public debt? In a democratic society, the national debt must be paid by the taxpayer. Tax increases reduce the purchasing power of society, which negatively affects the economy. In this case, the value of the currency will decrease.
7) Popularity of presidents:
If the president is popular, it can increase the demand for the currency. If the president’s popularity declines due to the government’s unpopular policies, it could lead to lower demand for the currency and a subsequent decline in its value.
8) War and terrorist attacks:
A terrorist attack can increase the likelihood of war. War or high potential war can reduce the demand for currency simply because war is depleting the economy. Wars are expensive and must be paid for by the taxpayer. In wartime there simply can be no growing economy. Consequently, war reduces the value of the currency.
9) Government growth:
Is the government growing too fast and developing? The new growth of development departments and the creation of unnecessary programs costs money. Again, taxpayers will have to pay for new growth, which in the long run will negatively affect the economy. The spread of the government can reduce the value of the country’s currency.
10) Tax cuts for consumers:
Tax cuts can stimulate the economy as long as the consumer spends the extra money he has. However, excessive tax cuts can also lead to high demand for goods, which can lead to higher prices, which can lead to inflation and the desire to buy cheaper foreign goods. But in general, tax cuts have always been good for the economy, which can lead to an increase in demand for the currency of this country.
11) Interest rate:
A higher interest rate means more demand for the currency. Foreign investors in the currency prefer a higher interest rate. The same principle applies when you are looking for the highest interest rate when depositing money into a savings account. This increase in demand for the currency leads to an increase in its value.
12) Housing market:
If the housing market is in recession, it means that the asking price of the seller will be lower, and with the knowledge that the person’s house is worth less, consumer spending will decrease. This has a negative impact on the economy. Again, poor economic conditions cause the demand for the currency to fall, leading to a drop in its value.
13) Positive or negative perception:
How currency buyers perceive the parameters described above can determine the degree of demand for the currency. Whether perception is correct or not is not as important as perception itself. Perception – that’s what determines whether the buyer of the currency decides to buy or sell the currency.
In conclusion, the factors presented here determine the degree of demand for the currency and, consequently, its value. There are other factors, such as increased production, the degree of entrepreneurship in the country, employment growth and even weather, and this affects the agricultural sector, energy consumption and the economy, the local economy.