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Explanation on Why Currency Exchange Rates Changes Currency exchange rates and how they work are one of the utmost importance for businesses, investors, currency traders and vacationers that is why they need to have basic knowledge about it. What are the things to know about that really affects the changes in the currency exchange rates? Below are a few things that contribute to the changes in the currency exchange rates. Firstly, it is the supply and the demand. Currency does not really differ from things like stocks, bonds or other investments because currency can also be sold and bought just like them. And basically, the law of supply and demand really dictates the price of what is being sold, like what other investments follow. The law of supply and demand is the principal thing in economics and it comes very basic for us all but it will always be the best starting point to learn about how currency exchange rate works. Political stability comes second on the list on things that affect the currency exchange rates. The country’s government is in charge in issuing the currency. The status of the country’s government plays a very critical role because if the government is not strong and stable enough to back its own currency, the currency will fail to exist or it will fail to survive in the long run. The state of the country really speaks to how strong or weak its currency is; the stronger and more stable and more peaceful the country is, the stronger their currency will be while countries which are in a lot of conflict have weaker currencies. Currency traders are not really interested in losing their investments in unstable and weak countries, that is why they invest in the more stable and peaceful countries instead. The decrease in its demand also affect its price, also lowering it.
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Third factor is Economic strength. Economics strength comes equally as critical as the factor of political stability. It works together with political stability because even though a country’s government is strong and stable, if its economic stature is in the toilet then, it will not really matter. Even worse is that, an economy who lags behind will find it very difficult to find investors and without investors to find, the country’s economy will suffer more. Currency traders are also paying attention to this factor and do not risk losing their investments so easily that is why they choose to invest elsewhere. A strong currency is usually the product of a strong and stable economy. Currency traders are usually monitoring closely the GDP, employment rates and other economic factors of a country to choose whether to invest or not.
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Fourthly, it is inflation. The higher the inflation in the country is, the lower the value of the currency is, while the lower the inflation rate in the country is the higher the value of the country’s currency is.

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