Forex trading is nothing but the trading of one currency for another. It is just like any other trade and with each passing day, a lot of people are trading in the forex market. Originally forex was invented as a hedge against risk. If you are in a business that buys and sells from or to abroad, forex is an effective hedge against loss due to currency fluctuation. Foreign exchange company in North India dealing in forex also helps in currency conversion for the individuals. Currency trading market is the backbone of international trade and investment between countries but a lot of factors need to be taken into consideration.
Let us see what factors affect the currency.
- Different Interest Rates Among Nations
This is the most important factor affecting a currency. The different interest rates among nations affect the exchange rates. Suppose the interest rate on deposits in the US are 3% and in India is 7%, where will you want to invest? India of course! But there are factors to consider as well. As money moves from the US to India there is more demand for Rupees which strengthens the Indian currency. As flow increase into the nation, its currency gains value and gets stronger. The Central Banks of each country decide the interest rates, the difference in interest causes inflow or outflow.
It is the second best-known factor. For example, India has decided to encourage business expansion by easing interest rates and has 3.5% inflation at the time. Not many money managers would rush to pull their money out of India. This is because even if it is going to earn less interest, their money would lose less buying power with 1% inflation increase. If they find another country where there is a better difference among low inflation rate and higher interest rates, they will move.
This is often the overlooked factor, but smart money managers don’t neglect this. The productivity of a nation’s workforce can also decide how big money firms manage their money. Productivity is an important factor for the nation. It is one of the foundations on which the country’s price structure is based. A workforce with higher productivity can afford to get higher wages and still price their products competitively. If the interest rate in the productive nation drops even by 1% it will create panic and in such a productive nation inflation is unlikely to rise to a point where real rate of interest gets unattractive.
- Balance of Trade
It is how much the country takes in form of selling goods as exports to how much it buys as imports. If a country exports less than it imports, then it has a negative balance of trade. The higher the negative balance, the greater the disadvantage to a nation. This means too much of the currency is flowing out. A nation that has a positive balance of payments will have a better exchange rate with a stronger currency.
All the above factors affect the currency value and is also the sum of how money managers react and how they value each other. Knowing how a currency performs is an important factor to consider during investments in a foreign exchange company in Ambala.
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