Everybody needs money for meeting the day to day needs of life, so people always search for areas where there is maximum profit on investments. Foreign exchange market is also known as the forex market is one the best investment option to put your money to work for you. Forex trading is the trading of currency in foreign exchange markets. Now foreign exchange markets are become more popular, because the people buy goods across international borders, so they use this medium to change their currencies. The forex market is one of the largest trading markets and it also located all over the world. Forex market fixes an exchange rate between currencies is the reason that the value of a currency relative to one another is changing day by day.
The forex market mainly consists of a three-tier system to maintain trade-related activities.
- First tier: constitutes of scheduled banks, they meet all the needs of the customers and also gave a status to forex business.
- Second ties: constitutes of mainly the licensed dealers such as commercial banks and cooperative banks. They carry out forex transactions and maintain the NRI accounts.
- Third tier: they are the licensed money changers to carry out transactions related to foreign exchange.
What are the Factors which Affect Foreign Exchange Trading?
- Capital Movements
Two factors which affect the exchange rate of the currency of a country mainly are the Foreign Direct Investment and Foreign Institutional Investment. Capital movements, the large capital inflows in the country will cause domestic currency appreciation and large outflow cause domestic currency depreciation.
- International Trade
International trade increases the demand and supply of foreign currencies. The rate export and import make a positive or negative impact on the foreign currency.
- Policies of Government
The rate of exchange is influenced by the central government by buying and selling of bills and currencies. Central Bank of a country also fixes an exchange rate for buying and selling of bills and currencies.
- Political Status
The political stability increases the capital inflows of the country. The political instability reduces international investments.
- Rate of Interest
The higher interest rate of a country, greater will be the investors attracted to the asset that gives more profit. Higher investment leads to an increase in the value of the currency of that country and vice versa.
- Balance Payments
Sometimes, there is an excess demand for foreign currency in a country, then a country receives through export sales. This trend reduces the rate of the exchange rate of a country.
- Some Assumptions
Now people searching for profitable investment plans such as automated trading robot assumes that the value of the currency will collapse in near future. Therefore, they will start selling the former currency and buy other country’s currencies according to their expectation. The selling trend increases the supply of former currency and which cause deflation and inflation of other currencies.
- the rate of Inflation
The economists say that the higher inflation rate of the currency of one country which causes the deflation of currency of another country.