Forex rate or Foreign Exchange rate is the rate at which one international currency is transferred into another. The forex rates remain in a constant state of flux and don’t settle down at a particular number. The reason for this is the changes that keep on happening around the world every single day. The following are five reasons why forex rates fluctuate.
Political stability of a country
A country’s political conditions can have a massive impact on the forex rates. If a country is going through a period of political stability, it will bring in foreign investment and capital. This, in turn, is going to help increase the forex rate. On the other hand, periods of political instability can have an adverse effect on the rate of foreign exchange, as it results in chaos and movement of capital away from the country. An example of this is Britain, where the pound has fallen a great deal because of the relative instability that is prevailing in the country after last year’s Brexit vote.
Import and export
The import and export of a country can result in fluctuation of the forex rates too. If the imports of a country rise then its currency’s exchange rate is going to go down. However, if its exports go up than the exchange rate for that country’s currency is going to go up as well.
The rate of inflation is another major factor that can influence the foreign exchange rates. The inflation rate measures the rate at which the prices of the products rise in a country. If this rate is low then the forex rate of that country’s currency will rise. If the inflation is high then the country’s forex rate is likely to fall down.
Forex rates can be affected a great deal by speculations as well. For instance, if there are speculations that the currency of a country is going to rise in the near future, the forex rate of that country’s currency will increase. Speculative news is among the major reasons for the volatility prevailing in the forex market these days.
Banks are the financial institutions of the country that are responsible for handling foreign capital. The different banking operations like taking up arbitrage, sale of drafts, acceptance of foreign bills of exchange, transference of funds and issuance of letters of credit can have an impact on the forex rates too and can cause them to fluctuate.