Exchange rates change for different reasons. Here are some important ones:
Interest Rates: When interest rates are higher in a country, it attracts more lenders. For example, if the U.S. raises its interest rates by 1%, the dollar can become 5-10% stronger.
Inflation Rates: Countries with low inflation can have stronger currencies because people can buy more with their money. For example, if the U.S. has an inflation rate of 2% and Europe has 4%, the dollar might get stronger.
Economic Indicators: Things like GDP growth, job rates, and how much people spend can affect exchange rates. If the U.S. GDP grows by 1%, the dollar's value might increase by about 3%.
Political Stability: Countries that are politically stable tend to attract more foreign investment. This can make their currency stronger. For example, during election years, the U.S. dollar can be more unpredictable.
Market Speculation: Traders in the forex market can cause big changes. If they expect good news about the economy, they might want to buy more of that currency.
All these factors work together to set exchange rates, which in turn affects how countries trade and invest with one another.
Exchange rates change for different reasons. Here are some important ones:
Interest Rates: When interest rates are higher in a country, it attracts more lenders. For example, if the U.S. raises its interest rates by 1%, the dollar can become 5-10% stronger.
Inflation Rates: Countries with low inflation can have stronger currencies because people can buy more with their money. For example, if the U.S. has an inflation rate of 2% and Europe has 4%, the dollar might get stronger.
Economic Indicators: Things like GDP growth, job rates, and how much people spend can affect exchange rates. If the U.S. GDP grows by 1%, the dollar's value might increase by about 3%.
Political Stability: Countries that are politically stable tend to attract more foreign investment. This can make their currency stronger. For example, during election years, the U.S. dollar can be more unpredictable.
Market Speculation: Traders in the forex market can cause big changes. If they expect good news about the economy, they might want to buy more of that currency.
All these factors work together to set exchange rates, which in turn affects how countries trade and invest with one another.