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What Drives The Forex Market Place?
1. Interest Rates
When we think of interest rates, we typically think of how much more or less it is going to cost us to borrow money and how much more or less we will earn on our investments. However, interest rates also have an important role to play in the economy.
Whenever a country increases its interest rates, it tends to attract more foreign investors because of higher interest rates. This results in the strengthening of the currency.
For example, higher interest rates in European countries may prompt investors to sell US dollars and buy bonds using Euros, thereby strengthening the Euro and bringing down the US dollar.
2. Gold
Gold is of course considered to be a country-neutral investment and thus a relative safe haven from the fluctuations in the market. It is also considered as an alternative to the reserve currency, the US dollar.
Thus, any strengthening in the price of the gold means the US dollar goes down.
3. Gold Producers
So far, we discussed how fluctuations in the price of gold could strengthen or weaken the US dollar. Similarly, the price variations of gold also affect the currencies of major gold producers like Australia or Canada.
When the price of gold goes up, the currencies of these two countries strengthens.
4. Oil
You may have heard of oil-dependent companies and major airlines complaining whenever there is an increase in the price of oil.
Similarly, even oil-dependent countries are hurt by rising oil prices, which causes their currencies to weaken.