Factors Influencing Currency Exchange Rates - World & Money Foreign Exchange Mechanics

There are a number of participants comprising the currency exchange markets. The banks comprise the largest forces and consist of a combination of transactions to facilitate business between multinational corporations and proprietary traders who are predominantly speculative or hedging bank currency exposure. International central banks are also active in the markets. Retail traders comprise a very small volume of currency transactions.

The current currency exchange rates are influenced by the economic fundamentals that affect the country. Current Account Deficits, interest rate differentials, growth rates, employment and business activity all affect the demand and supply of the currency. When demand for resources is high, this puts upward pressure on commodity producing countries such as Australia and Canada. High interest rates in one country can also affect a countries currency exchange rates because it encourages capital inflow from international speculators who borrow in one country at a lower rate and seek to exploit the difference between interest rates. This is called the carry trade and has been facilitated by the Yen in recent years due to the low interest rates on offer in Japan. The US, who have enjoyed a strong currency exchange rate and the world's 'reserve currency status' for many years have had a distinct advantage over other countries due to the fact that crude oil is priced in US dollars. This has helped to keep the US rate artificially high.

If you are traveling and want to secure the best rate, it is best to carry currency in the major denominated currencies such as the US and Euro. Some countries do not readily carry foreign exchange for lesser known currencies and it can be difficult to do currency exchange conversions.