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Foreign Exchange Market ✓Foreign Exchange Market is the market where traders buy and sell currencies. ✓Currencies are identified by a three- letter code (for example: EUR) and currency pairs are identified by a six- letter code (for example: EUR/USD). ✓ Today, the Foreign Exchange Market is the world’s market, with an volume of about $5 trillion. largest average financial daily
Factors that affect Foreign Exchange Rates Interest Rates Inflation Government Debt Speculation
Factors that affect Foreign Exchange Rates 1. Inflation: A country with a consistently lower inflation rate results in rising currency value while a country with higher inflation sees depreciation in its currency value. 2. Interest Rates: Higher interest rates provide higher rates to lenders, thereby attracting more foreign capital, causing an appreciation of the exchange rate. 3. Government Debt: Government debt may influence the Foreign Exchange Rate. If markets fear a government may default on its debt, then Foreign investors will sell their bonds in the open market causing a fall in the value of the exchange rate. 4. Speculation: Suppose a country’s currency value is expected to rise, investors will demand more of that currency in order to make a profit in the near future. Because of this, an increase in currency value comes a rise in the exchange rate as well.
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