What affects the value of currency pairs? While the residents of Econville were inquiring with one another, Dr. Mishov instructed them to assemble in the town square in order to receive an explanation.
Once again, a crowd in the town square of Econville assembled, ready to hear the knowledge that Dr. Mishov had to offer through his stories. Today was the day when he was going to reveal the secrets of what influences the values of currencies on the foreign exchange market. While he was standing with his characteristic chalkboard, he started telling a story about the factors that cause currencies to rise and fall.
1. Economic Indicators: The Heartbeat of a Nation
Dr. Mishov flashed a smile and pointed to a heartbeat that had been drawn on the board. Take into consideration a nation as a living being. Indicators of the economy indicate the state of the economy and tell us how healthy it is. Growing a nation's gross domestic product (GDP) is a sign of strength, much like an athlete who is well-fed. As a result, investors are drawn to the currency, which strengthens it.
He indicated the map with his finger. In 2021, consider the United States. As a result of its GDP growth exceeding projections, the dollar experienced a rise. Take, for example, the Eurozone: If inflation is too high, the European Central Bank may decide to hike interest rates in order to bring inflation down, which boosts the Euro.
2. Interest Rates: The Magnet of Money
He went on to say that interest rates are similar to magnets that attract global capital. Investors are drawn to high rates because they promise higher returns on their investments. The demand for the currency increases as a result of this.
When Dr. Mishov thought back to a recent occurrence, he laughed. As a result of the Federal Reserve of the United States' aggressive rate hikes in 2022, the value of the dollar increased in comparison to other currencies such as the Japanese yen (JPY). But if a nation like Japan maintains low interest rates, their currency may decline, which would result in the yen becoming more affordable for imports. which of the following might be the policy of the Bank of Japan (BOJ) for preserving a higher trade balance?
3. Political Stability: Serves as a Dependable Anchor
Picture a ship in a storm. Political stability is the anchor. The currency of a stable nation is strengthened because it is more likely to attract trust and investment. But when the waves are turbulent, currencies have the potential to sink.
He paused dramatically. Remember Brexit? During the course of the negotiations, the British Pound was thrown around roughly like a toy boat. A stable election outcome in the United States, on the other hand, tends to enhance the dollar since the world trusts the institutions of the United States.
4. Supply and Demand: The Eternal Dance
When Dr. Mishov was asked about currencies, he responded with a shimmering charm, saying that the everlasting law of supply and demand governs them. The value of a currency increases whenever investors seek more of that money. What about when there is an excessive supply? Down it goes.
He shared a story. The dollar saw a rise in value during the COVID-19 pandemic because everyone desired the security that the USD offered. While demand skyrocketed, competing currencies struggled to retain their value.
5. Market Sentiment: The Invisible Hand
Ah, sentiment! Market sentiment is the invisible hand of hope and fear, although they are not always obvious. Investors who are feeling optimistic are more likely to take risks. However, when they are afraid, they cling to safe havens such as the United States Dollar, the Swiss Franc, or the Japanese Yen (JPY).
He recalled the year 2022. Shockwaves were thrown across the markets as a result of the situation in Ukraine. They raced to the Swiss Franc, which resulted in the currency being stronger. When there is uncertainty, safe havens shine.
6. Geopolitical Events: The Storms of the Market
Dr. Mishov sighed and stated that there are moments when the world is shaken by events. These include wars, natural calamities, and sanctions. The storms affect the stability of currencies.
Take, for example, the conflict between Russia and Ukraine. Russia's sanctions caused the ruble to lose value, while safe-haven currencies such as the dollar increased in value. Even natural disasters, such as the tsunami that struck Japan in 2011, generated waves in the market.
7. Central Bank Interventions: The Master Puppeteers
At one point, Dr. Mishov made an argument that central banks are comparable to puppeteers who wield the strings. They have the ability to intervene in order to stabilize or regulate their currency.
He drew a hand holding strings. In 2015, the Swiss National Bank stunned everyone by removing the cap on EUR/CHF. The Swiss Franc (CHF) had a meteoric rise overnight. Such interventions can reshape the market.
8. Commodity Prices: The Golden Link
Dr. Mishov held up a gold coin. The prices of commodities such as gold, oil, or iron ore are like lifelines for currencies that are connected to commodities. It is common for the currencies to grow in tandem with these.
He flashed a smile. Can you recall Canada? A rise in the price of oil in 2022 contributed to the strengthening of the Canadian dollar (CAD). In the case of the Australian dollar (AUD), the story is similar to that of China and Australia's trade in iron ore.
9. Government Debt Levels: Representing the Weight of the Anchor
According to Dr. Mishov, a currency can be weighed down by debt. Investors lose faith in a nation when it has an excessive amount of debt.
In order to show this, he used Greece as an example. While the Eurozone was experiencing a debt crisis, Greece's difficulties caused the Euro to lose value, which in turn caused the entire currency of the zone to be unclear.
10. Global Economic Conditions: The Ocean of Influence
A large ocean was indicated by Dr. Mishov's gesture. Everyone is affected by the global conditions. Commodity currencies such as the Australian dollar (AUD) and the New Zealand dollar (NZD) prosper when the global economy is booming. Safe-haven currencies, on the other hand, shine during recessions.
He concluded with the financial crisis of 2008. "As investors sought refuge, the United States Dollar (USD) became a stronghold." When economic growth resumes, however, currencies that are dependent on exports and commodities begin to recover.
