The data presented here is designed for the Forex/currency trader. This information is also useful to anyone that would like to develop an understanding of aspects which determine currency value. For the currency trader, this understanding is necessary in order to develop a currency trend analysis for a particular country. Developing accurate currency trends is the key to successful Forex trading.
What determines the value of the countries currency really comes down to provide and demand of that currency. If a particular countries currency is in high demand by purchasers such as travelers, government authorities, and investors, this will increase the value of the countries currency. The elements that follow may have a positive or unfavorable affect on the demand for a particular currency. Lets take a look at these aspects.
1) Printing of Currency:
If a country prints an excessive amount of currency, a lot more then what it normally would, this can decrease the value of the currency. When you have more of anything, this can result in a decrease in it’s value. This is true whether you are talking about currency or goods such as iron ore, crude oil, fossil fuel, gold, silver and platinum. A great deal of currency in circulation can decrease the value of a currency. A small amount of foreign currency in circulation can result in the value of the particular currency increasing.
2) Current Condition of the Economy:
If a countries economy is not doing well, this can decrease the particular demand for that countries currency. Particularly, here we are talking about the degree associated with unemployment, degree of consumer spending, and extent of business expansion that is taking place in a country. High joblessness, decrease consumer spending, with a reduction in business expansion, means a poor economy and a decrease in currency value.
The opportunity of economic growth in a country also needs to be looked at. If the potential is solid, then it’s currency value might expect to increase. Also, if a nation produces products that other countries want to buy, this can increase the value of that countries currency.
3) Prices of Foreign Goods:
Related to the economic climate, is the prices of foreign items. If a foreign company sells goods in a country which are cheaper then comparable products produced in that country, this can hurt the economy of that country. A poor economy results in the decrease in demand for that countries currency, which lowers it’s value.
4) Political Conditions of a Country:
As to what degree does political corruption exist within a country? To what degree do political affairs have on the economy of that country? A country that is known to have corrupt politicians, can lead to a lowering of the value of it can currency.
5) How Secretive is a Country:
A country which functions at a high level of secrecy, at least as observed by those outside the country, can result in a lowering of the value of their currency. Another phrases, if not much is known about a nation due to a restriction of media expression within that country, this can reduce the value of it’s currency.
6) National Debt of a Country:
To what diploma are politicians addressing a national debt problem? Are politicians causing an increase in the national debt? Within a democratic society, national debt should be paid by the taxpayer. If taxes increase, this results in a lowering of the purchasing capability of society, which usually results in a deleterious affect around the economy. In this case, currency value can decrease.
7) Presidents Popularity:
In case a president is popular, this can boost the demand for a currency. If the presidents popularity is dropping, due to unpopular government policies, this may result in a decrease in demand for a currency and a subsequent lowering of it’s value.
8) War and Terrorists Attacks:
A terrorists attack can increase the possibility of a war. A war or the strong potential for a war may decrease the demand for a foreign currency, simply because a war drains the economy. Wars are expensive and should be paid by the taxpayer. You simply can not have a growing economy during battle time. So war lowers the value of a currency.
9) Government Development:
Is government growing and growing to much? New growth by developing departments, and creating needless programs, all costs money. Once again, the taxpayer will need to pay for the brand new growth, which for the long run has a negative affect on the economy. Extra government growth can lower the value of a countries currency.
10) Taxes Cuts for the Consumer:
Tax cuts can stimulate the economy, as long as the consumer spends the extra money she or he may have. But also, tax cuts that are to large can result in high demand regarding products, which may raise prices, which can lead to inflation and the desire to buy cheaper foreign products. But in common, tax cuts historically have been good for the economy, which can result in a rise demand for that countries currency.
11) Interest Rates:
A higher interest rate means a greater demand for a currency. Foreign traders in a currency prefer a higher curiosity. It is the same principle when you look around for the highest interest rate when placing money into a savings account. This embrace demand for a currency results in a rise in it’s value.
12) Housing industry:
If there is a slowing of a housing business, this means the sellers asking price is going to be less, and with the realization that an individuals home is worth less, this results in less consumer spending. This has an adverse affect on the economy. Again, bad economic conditions result in a lower requirement for the currency, thereby lowering they have value.
13) Positive or Bad Perception:
How purchasers of a currency perceive the previous discussed parameters, may determine the degree of demand for any currency.
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Whether or not the perception is accurate or not is not as important as what the perception itself is. Understanding is what determines if a currency buyer decides to buy or sell the currency.
To conclude, the factors displayed here are determinants of the degree of need on a currency, and therefore it’s worth. There are other factors such as manufacturing development, degree of entrepreneurship in a country, work growth, and even the weather and it’s have an effect on on the agricultural industry, energy intake, and local economies. These may also determine the demand for a foreign currency. The factors listed here determine the perception that a potential buyer of currency may have. And here, perception indicates everything. How a potential buyer of the currency looks at a particular country providing a few parameters, will determine the demand on the currency, and ultimately they have value.
With this understanding, it is not difficult to see why the value of the US dollar offers dropped so much lately. This is primarily due to a sky rocketing federal debt, the lack of the current administration’s desire to reduce the federal deficit, enormous government growth, the fed’s high level of money printing, a slow housing market, a reduction in the President Obama’s popularity, and a current poor economy which includes fairly high unemployment, all of which were formerly discussed. Investors outside the United States are looking at the US dollar as to risky, which usually results in a decrease in demand for your US dollar, and a drop in it’s value.