Forex Information - The Mysterious Workings Of The Exchange Rate And The Impact On Forex (Part 4)

When a country’s economy is strong, people know that they’ll make more money if they invest in businesses and products in that country. In order to buy products or invest money there, they need to exchange their currency for that country’s currency. If there’s a rumor that a major industry in that country is about to fail, people will want to get out – and will start trading in their yen for dollars or Euros or Aussies – whichever is the best exchange rate you can get.

So it’s all about supply and demand?

There are a couple of other factors that influence exchange rates. One of those is the interest rate. When you hold currency, you earn interest in that country’s currency at their prevailing rate. If the interest rate is higher for yen than for dollars, then people will trade in their dollars for yen in order to earn a higher rate. A second factor is the inflation rate. When the inflation rate in a country is high, people don’t want to hold that country’s currency since the value of the money is going down. Likewise, if the inflation rate is low, people are more likely to want the country’s currency because the value isn’t expected to go down.

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