Why exchange rates fluctuate

REAL INTEREST RATES SPECULATORS Real interest rates are simply An influential factor in short term changes to exchange rates, speculators typically have enormous amounts of capital, buying and selling currency for profit. The amounts being dealt with can cause major swings in the exchange rates, as speculators attempt to anticipate market movements. measured as the nominal interest rate minus the rate of inflation. A higher real interest rate makes investment in a country more attractive, which in turn leads to a rise in the value of that currency. RELATIVE INTEREST RATES SPECULATORS CAXTONFX Why exchange ECONOMIC GROWTH Steady economic growth is vital to meet the needs of a growing population and an important factor affecting investor confidence. If growth is very low or negative, central banks will often CENTRAL BANK ACTIONS With interest rates already very low in many major economies including the UK, central banks are turning rates to less common measures to kick fluctuate start their struggling economies. Quantitative easing (QE) is one such measure, which involves the purchase of government bonds and other assets from financial lower interest rates, TRADE BALANCE POLITICAL STABILITY which usually weakens the currency. institutions to provide the banking system with more liquidity. The objective is to increase lending and sometimes devaluethe currency in order to reduce the price of exports, but can risk causing hyper inflation. TRADE BALANCE POLITICAL STABILITY A countries trade balance is the total value of its exports minus the total value of its imports. A favourable trade balance increases demand for cur- A stable political environment presents less risk to investors. If there is political uncertainty investors will be wary and hold off from investing in that economy, often leading to an exchange rate decline. rency, whereas a deficit may lead to devaluation if the supply of a country's currency greatly outweighs demand. ECONOMIC GROWTH ACTIONS CENTRAL BANK