What Moves Exchange Rates?
1. Interest Rates (Central Banks): When a country's central bank raises interest rates, its currency usually gets stronger. Higher rates attract foreign investors looking for better returns, increasing demand for that currency. The US Federal Reserve, European Central Bank, and Bank of England decisions move forex markets every single time.
2. Inflation: A country with low inflation generally has a stronger currency. High inflation erodes purchasing power, making that currency less attractive to hold or invest in.
3. Trade Balance (Imports vs Exports): If a country exports more than it imports, demand for its currency rises because foreign buyers need that currency to pay for goods. A trade deficit has the opposite effect.
4. Political Stability: Investors prefer stable countries. Elections, wars, policy uncertainty, or government instability can weaken a currency quickly as investors move money to safer options.
5. Market Speculation: Trillions of dollars are traded in forex markets every day, and much of it is by traders and institutions speculating on future rate movements. This speculation itself drives short-term rate changes.
6. Supply and Demand: At its core, exchange rates follow supply and demand. If more people want to buy US Dollars than sell them, the Dollar's value goes up.