What Influences the Foreign Currency Exchange Rate?The foreign currency exchange rate, also known as the currency rate of exchange, is the movement in the value of a nation’s legal tender, which makes a forex currency trade possible.These influences often come through as forex indicators which, when used in your currency trading strategy, will tell you which currencies to trade and which to steer clear of at any given time. Foreign currency exchange rates are never static. They are always pipping up and pipping down, depending on a number of wide and varied factors. There are many factors that can influence a currency’s value or exchange rate. The major influences are historical, political, economic, social and climatic. Many of these factors tend to blur into each other and, in fact, when a currency dips or rallies in a major way it is usually a combination of factors that contribute to the price movement. For the average person, the only time you ever worry about the foreign currency exchange rate is when you’re buying or selling an item overseas, or when you’re about to take an overseas holiday. Or, occasionally, a weather event might affect the price of a type of food you like to eat (such as Australian bananas or Japanese seaweed). However, many forex traders relish these price movements as it’s an opportunity to make money. While nobody ever wishes political turmoil or a catastrophic weather event to befall a nation, events like economic announcements or positive social change can positively impact the tradeability of a currency (and, in turn, increase the value of a currency). We’ll cover each of these factors individually: 
Historical: The historical data of a currency’s price movements are of particular value to the forex currency trader who relies on technical analysis. Technical analysis is when you map out the historical price movements of a currency on a chart, and try to map the most likely direction the currency will travel in the immediate future. Currencies will often react at similar values where it has reacted before. For example, take the Australian dollar when traded against the US Dollar. Back in the good ol’ days the best price you could reasonably expect to get for one Australian dollar was around 80 US cents – on a good day. During the recent economic turmoil, the 80 cent point was a place of much reaction, until the Aussie battler fought ahead and reached parity and beyond. Political: The political climate affects a foreign currency exchange rate incredibly. History plays a part in politics, as does the economic and social landscape of a country. Very basically, if a country’s politics is stable, it’s likely that its currency will be fairly strong and stable as well. Economic: There are two factors to consider when looking at the economic impact on a currency’s value. This is the domestic economy, ie, how wealthy is the average person in a certain country, as well as the international economy, ie, how wealthy is the country overall when compared with other countries? In essence this is exactly what currency trading is all about. Social: This is another area that blurs into historical, political and economic factors. Any country that experiences major civilian uprising is not going to have a very strong currency. These currencies usually fluctuate madly in value, and are very much at risk of being manipulated quite badly if traded without care. Climatic: This is the least common, but most severe factor. Catastrophes such as earthquakes, tsunamis and freak storms have the capacity to bring the functioning of a currency to a screeching halt. Often, governments will try to bolster their currencies by sinking money into them, which renders them fairly unpredictable and untradeable. The foreign currency exchange rate is influenced by many other factors, but the major ones are outlined above.
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