What causes forex market fluctuations?
The forex market is highly volatile, wherein the participation of various entities such as commercial banks, forex traders, hedge funds, central etc., from all over the world make up a daily trading volume of over $5 trillion. Foreign currencies are bought and sold in the forex market by individuals or corporations depending upon their needs and goals and for various purposes ranging from currency hedging to online forex trading. The far-reaching impact of the foreign currency exchange rate fluctuations reaches all the forex transactions irrespective of their scale, whether it be international trade, overseas money transfer, or currency exchange for overseas travel. What's the reason behind forex market volatility and changes in the exchange rates?
The economy, businesses, consumers and remittances of a country are widely influenced by the currency fluctuations and, thereby, the movements of the forex rates. The appreciation and depreciation of the currency and the various driving factors such as inflation, interest rates, current account, geopolitical condition, economic condition, and terms of trade collectively create an impact on a country's economy and, ultimately, the scenario of international trade.
Effects of exchange rates on the economy:
The most prominent impact of currency fluctuations can be seen in international trade, wherein a depreciating currency stimulates exports by making it relatively inexpensive and hampers import by making it expensive. This works towards decreasing the country's trade deficit, whereas on the other side, an appreciating currency can harbour opposite outcomes, with imports becoming cheaper and exports expensive, effectively widening the trade deficit.
However, contrary to popular beliefs, a stronger currency might not always facilitate a national economy to witness a boom as it can cause a drag on the economy by rendering the industries uncompetitive and thus increased unemployment. On the contrary, a weaker currency can foster the growth of a country's economy with boosted exports and GDP, which is directly linked to it.
Balance of payments – Current account deficit refers to the situation where a country's imports exceed its imports. In this scenario, decreased value of the currency can boost exports due to it becoming inexpensive and reduce imports shrinking or offsetting the current account deficit.
Inflation rates - One of the major determinants of exchange rates is inflation, wherein a country with low inflation might witness an increase in the value of its currency compared to others, whereas high inflation in countries can severely hamper the purchasing power of its citizen and the value of its currencies, thus witnessing a fall in the exchange rates.
Interest rates- A country with higher interest rates witnesses foreign investment and cash inflows in its economy, causing an increased demand for its currency and the currency's value will rise with it. In contrast, a country with a lower interest rate might not be attractive to foreign investors leading to cash outflows, and the exchange rate will drop.
Currency fluctuations impact on businesses
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10 Mar 2021 05:00 PM
It operates for five days a week and 24 hours a day wherein currency is traded electronically, the value of which is dictated by the fluctuating foreign currency exchange rates. The forex market's importance is not just confined to larger corporation
04 Mar 2021 03:08 PM
Contrary to popular beliefs, the forex market's importance is not just constricted to commercial banks and large corporations. The smallest of the operations involving an individual
11 Aug 2020 07:01 PM
Online currency trading platforms and a reduced barrier to entry, Forex or currency trading has witnessed a surge in individual investors' participation.
21 Jul 2020 06:13 PM
A country’s exchange rate and its imports and exports hold a complicated relationship as there is a constant feedback circuit between the way a country’s currency is valued and the international trade.
29 Jun 2020 05:35 PM
Dynamic hedging is a foreign exchange risk management strategy that allows businesses and individuals to readapt their hedging positions to evolving market conditions by providing flexible solutions to protect investments from exchange rate risks.
19 Jun 2020 05:01 PM
Management of Currency Exchange Risk is of paramount importance during turbulent times, like this pandemic. The currency fluctuations are very volatile and cannot be predicted as the circumstances are uncertain.