Currency Movements

Fundamentals make currency pairs move. If the economic fundamentals in the United States are improving, the U.S. dollar (USD) will most likely be getting stronger because Forex investors will be buying dollars. Conversely, if the economic fundamentals in the United States are declining, the U.S. dollar (USD) will most likely be getting weaker because Forex investors will be selling dollars. Every country has various fundamentals and economic indicators that affect that countries currency against other currency crosses (pairs).

The main points underlying these fundamentals are interest rates, capital flows both in and out and internal economic factors. Interest rates are undoubtedly the main indicators, currency moves where the higher interest’s rates are available. If one country has higher rates then market participants will sell one currency to buy another currency with higher yields. Therefore this will make the currency of the country with the higher internal interest rates stronger as demand for it increases. This is a reason you normally see large currency moments when central banks increase or decrease interest rates.

The main driving force behind interest rates is inflation; moderate inflation is generally accepted as a natural by-product of economic growth. Too much inflation, however, can seriously affect an ecomony. Central banks are always on the lookout for rising inflation. When they see inflation rising to uncomfortable levels, they can combat rising inflation by raising interest rates.

Higher interest rates make it more difficult for businesses and individuals to borrow money to buy and build new items, which slows economic growth and, as a result, inflation.

In addition the Consumer Price Index (CPI) and the Producer’s Price Index (PPI) are two other important economic indicators of inflation. The CPI being the economic indicator that measures how much a basket of goods that consumers regularly buy costs. And the PPI is the economic indicator that measures how much producers must pay for the raw materials they use to produce their finished goods.