What Moves Rates?

by RefcoFX

In the currency market, traders buy and sell currencies with the hope of making a profit when the value of the currencies changes in their favor, whether from market news or events that take place around the world. Currencies, just like any other commodity that can be bought or sold, are subject to the laws of supply and demand. When more people want a particular currency, the cost of the currency in terms of other currencies will go up. When demand decreases or people do not want to hold a country’s currency, the value will go down. What factors affect supply and demand for a currency?

Economic Growth

Investors want to be sure that they are investing in a solid economy that is achieving steady growth. Currency traders looking to assess the economic growth of a country will look at unemployment, trade, and GDP data.

<table align="center" border="1" bordercolor="#006699" cellpadding="5" cellspacing="0" width="300"> <tbody><tr> <td bgcolor="#006699">What Happens If...</td> </tr> <tr> <td><table border="0" cellpadding="5" cellspacing="0" width="300"> <tbody><tr valign="top"> <td width="50">BAD</td> <td width="150">Rise in Unemployment</td> </tr> <tr valign="top"> <td width="50">GOOD</td> <td width="150">Fall in Unemployment</td> </tr> <tr valign="top"> <td width="50">GOOD</td> <td width="150">Rise in GDP</td> </tr> <tr valign="top"> <td width="50">BAD</td> <td width="150">Fall in GDP</td> </tr> <tr valign="top"> <td width="50">GOOD</td> <td width="150">Rise in Exports</td> </tr> <tr valign="top"> <td width="50">BAD</td> <td width="150">Fall in Exports</td> </tr> </tbody></table></td> </tr> </tbody></table> Interest Rates

Money tends to follow interest rates. If interest rates go up, money will flow into the country from all over the world as investors seek to capitalize higher returns. To determine whether interest rates will rise or fall, investors pay attention to economic inflation indicators as well as speeches by influential figures. Generally, the timing of interest rate moves are known in advance. They take place after regularly scheduled meetings by the BOE, FED, ECB, BOJ, and other central banks.

<table align="center" border="1" bordercolor="#006699" cellpadding="5" cellspacing="0" width="300"> <tbody><tr> <td bgcolor="#006699">What Happens If...</td> </tr> <tr> <td><table border="0" cellpadding="5" cellspacing="0" width="300"> <tbody><tr valign="top"> <td width="50">GOOD</td> <td width="150">Rise in Interest Rates</td> </tr> <tr valign="top"> <td width="50">BAD</td> <td width="150">Fall in Interest Rates</td> </tr> </tbody></table></td> </tr> </tbody></table> Political Stability

Election turmoil, changes of government, high unemployment and international conflict all make investors cautious to put their money in a given country. Investors will watch for major news that comes out of a country.

<table align="center" border="1" bordercolor="#006699" cellpadding="5" cellspacing="0" width="300"><tbody><tr> <td bgcolor="#006699">What Happens If...</td> </tr> <tr> <td><table border="0" cellpadding="5" cellspacing="0" width="300"> <tbody><tr valign="top"> <td width="50">BAD</td> <td width="150">Geo-Political Tensions</td> </tr> <tr valign="top"> <td width="50">BAD</td> <td width="150">Natural Disaster</td> </tr> <tr valign="top"> <td width="50">BAD</td> <td width="150">Threat of Terrorism</td></tr></tbody></table></td></tr></tbody></table>

I like it. Keep it coming,

Jim

gd for newbie like me thanks for sharing

This is the same information that's on the FXCM website. I believe it's in their "education" section on trading. This information could mislead people though. If i'm correct, a rise in interest rates is an attempt by the fed to contain inflation, which is the most ugly thing that's killing the value of our money and assets. What throws me off is that when we raise rates I thought that means banks typically lend out less money/loans, which obviously does the exact opposite of stimulating growth. When rates are lowered, that attracts more banks to lend out money which encourages growth and stimiulates the economy. However it makes sense that investors would want a high interest rate like 17% (US interest rate in the 1970s!!!) over something like 0.25%. So I still haven't figured out if a rise in rates is good or bad for the currency. It is important to note, however just because a country's currency is strong, that doesn't make it good.....

What happens when that idiot Bush speaks?

GOOD or BAD?

In short it’s the portfolio flows into a country that drive the currency value higher. Investors are looking for growth and when a central bank signals that there are inflation risks it is usually the result of an economy growing above potential.

Also the way you describe the negative effects of inflation are a bit out of context. A "high" rate of inflation in the neighborhood of 3% annually is only marginally worse for a country then a "low" 2% rate. In the grand scheme of things it means next to nothing for the short to medium run valuation of a currency. Ofcourse if inflation was running at 10%+ it would be a completely different story...

As a side note, inflation isn't inherently bad. If the inflation rate was zero, the inherently risk averse population that had money and assets would have no compelling reason to take on the risks associated with capital investment. If they simply stuck their money in a savings account (as they would most assuredly do) the economy would grind to a halt. A stable, but low inflation rate forces people to take on the investment risks that will ultimately lead to their long run economic prosperity. Again, if inflation was running at 10%+ it would be a completely different story...<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /><o></o>

Thank you, that helps clear it up

it depends. its not like "sell $ whenever you see bush live on screen".