Trading

Equity
Commodity
Currency
How Is the Price of a Currency Determined?

There are various factors that affect the price of any given currency. Read on to know what they are.

If major buyers in the currency market believe that a specific currency will appreciate in the near future, they will buy more of that currency.

The value of a specific currency is not determined by any government or regulating body. It is the result of a number of factors that come into play. Here's a look at some of these factors.

Demand and supply

The demand for a specific currency is mainly driven by the demand of goods, services and investments offered by the issuing country. For instance, if the demand for Indian IT services is high, more international players will need Indian Rupees to buy these services, thereby pushing the value of Indian currency up.

Speculators

If major buyers in the currency market believe that a specific currency will gain more value in the near future, and consequently, buy more of that currency, its price will rise due to this increase in demand, and vice versa.

Political and economic conditions of the country

The stability of the government and the economic condition of a country also affects the price of its currency. If, for instance, the US government is unstable or the country is facing a financial crisis, the development of the country will certainly slow down. This will cause the value of the US dollar to fall. Similarly, if these conditions are favorable, its value will move upwards.

Other factors

Currency value is mainly determined by the future prospects of the country it belongs to; it is hence affected by a number of factors. These include population demographics,prevailing interest rates, war and conflict situations, unemployment rate, inflation reports, budget announcements, etc.

It would be appropriate to conclude that the price of a specific currency is determined by not just one, but many factors. Understanding these factors will not only educate you on the currency market's mechanism, but also help you trade currencies efficiently.

Disclaimer:

This article (“Article”) is licensed to or is the property of Religare Corporate Services Limited (“RCSL”, which would mean to include its group companies, wherever applicable). This Article should not be reproduced or redistributed to any person or in any form in whole or in part without prior and explicit written consent of RCSL. This Article reflects the views of the author or content provider, and RCSL disclaims all liability, whatsoever, arising out of the substance or contents of this Article or in connection thereto, including any matter relating to infringement of intellectual property rights. This Article is purely for the purpose of public awareness and education and any reference to any financial product should not be construed as an offer or solicitation of an offer to buy or sell any securities, financial instruments or insurance. RCSL does not guarantee the accuracy or completeness of the information contained herein and there can be errors both typographical and in content. The Article may be referred only as a general guide and not as the ultimate source of the subject matter discussed. The Article must not be relied upon for taking personal, medical, legal or financial decisions and an appropriate professional must be consulted for specific advice tailored to specific situations. RCSL and any persons connected thereto do not accept any liability arising from the use of this Article. This disclaimer forms a part of, and should be read in consonance with, the Terms and Conditions of this site.

Copyright 2012 Religare. All rights reserved. Trademarks are the property of their respective owners.

This site is best viewed with Internet Explorer 7.0 or higher; Firefox 2.0 or higher.