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Economic Variables Impacting Exchange Rate Movement

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Posted by : NIFM
30 December, 2013, 2:33 PM
Various economic variables impact the movement in exchange rates. Interest rates, inflation figures, GDPare the main variables; however other economic indicators that provide direction regarding the state of the economy also have a significant impact on the movement of a currency. These would include employment reports, balance of payment figures, manufacturing indices, consumer prices and retail sales amongst others. Indicators which suggest that the economy is strengthening are positively correlated with a strong currency and would result in the currency strengthening and vice versa. Currency trader should be aware of government policies and the central bank stance as indicated by them from time to time, either by policy action or market intervention. Government structures its policies in a manner such that its long term objectives on employment and growth are met. In trying to achieve these objectives, it sometimes has to work around the economic variables and hence policy directives and the economic variables are entwined and have an impact on exchange rate movements. For instance, if the government wants to stimulate growth, one of the measures it could take would be cutting interest rates and if such a measure is seen to bear expected results the n the market would react positively and its impact would also be seen in the strengthening of the home currency. Inflation and interest rates are opposites. In order to reduce inflation, which reduces the purchasing power of money? Often the policy of high interest rate is followed but such a policy hinders growth therefore a policy to balance inflation and interest rates is considered ideal and the perception of the success of such a policy by the participants in the foreign exchange market will impact the movement and direction of the currency.

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