EXCHANGE RATES AND APPRECIATION

If you are intent on investing your hard earned money on the Forex market then you

need to know what causes the exchange rates of foreign currencies to increase (appreciate) and decrease (depreciate). Some of these reasons include high interest rates, a drop in inflation and speculation but there are dozens of other highly complex reasons that should also be explored. What follows are just some of the more obvious reasons why foreign currencies appreciate in value.

When foreign currency exchange rates appreciate in value it is as a result of a variety of factors. It has a huge impact on the market and can cause either celebrations or commiserations for Forex traders. Although every independent nation has a currency, the idea of trading them off against one another has only happened in the modern era. It is a multi-trillion dollar industry which is as volatile as plastic explosives but if it goes off it can cause far more damage economically speaking. If a trader has dollars, euros or yen they are eager to see it go up in value as this will enable them to gobble up other currencies that have grown weak against it.

High interest rates are one factor that could result in a currency appreciating in value. For example, if the United States' interest rates rose it would result in a major influx in investment because these clearly higher rates equal better savings. This would cause an increase in demand for dollars so that foreign investors could take advantage of the favorable interest rates. Basic economics dictates that when demand outweighs supply in any product its price is certain to increase and this is no different when it comes to exchange rates on foreign currencies.

As any trader will tell you, it's not about what news you receive it's about how you receive it. Theoretically speaking at least, if an event that could have a cataclysmic effect on the world's currency markets was reported and traders didn't bat an eyelid, then the market would not be greatly altered. Of course what would really happen would be mass panic. Speculating on exchange rates is what drives the entire market. If a trader has inside information about a currency that may go up in the future they will act now to get ahead of everyone else. News has a habit of filtering out so as a result there will be a lot of activity amongst traders which will inevitably lead to market change.

A nation's inflation is also a critical component when it comes to exchange rates appreciating in value. A country with a low inflation rate will obviously be a good place to buy imports from. This will lead to higher demand for goods, services and currency which will cause it to rise in value.

If you trade on the Forex market then you will need to become acquainted with the myriad of reasons why a currency will depreciate and appreciate in value. If you don't have at least this rudimentary grasp of the market then you are likely to be left behind as more knowledgeable traders prosper.

EXCHANGE RATES AND APPRECIATION

By: Maureen Holland

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