Forex 101: What Moves Currencies?

Joined : 23 Dec 2007 Posts : 239 Location : Nigeria

Good Day Currency Traders!
Today, I thought I'd give you a preview of what I'll be discussing later this week, starting with what moves currencies - interest rates.

Why Interest Rates Matter
Money seeks higher yields. After all, everyone wants to earn the most on their money, so traders go after currencies with higher yields.

So as interest rates start to rise in a country, traders send their investment capital sailing towards that country. How do you earn another country's interest rate? You convert your currency into their currency. This is done by the selling of your currency in the foreign exchange market and buying that higher yielding currency.

We know that when traders sell a lot of any one asset, the price falls lower. On the flipside, when traders buy a lot of any one asset, the higher demand drives prices up.

When interest rates are rising, traders convert their currencies to that country's currency, and drive that higher-yielding currency higher.

Inflation = Higher Interest Rates
So how do you know when a country is about to raise their interest rates? You look for countries with high inflation. Central banks raise interest rates to tame inflation so it doesn't get out of control.

There is a way to quantify and track inflation. It's called the CPI (the Consumer Price Index). This is simply a "cost of living" index. It tracks the costs of things such as transportation, food and medical care. You can find out when governments will announce the CPI levels on economic calendars. You can find economic calendars at www.forexfactory.com or www.dailyfx.com.

As the CPI gets above the central bank's "comfort level," the central bankers hike rates to get inflation under control.

How To Tell What "Inflation"
Really Means to Central Bankers
You can go to a central bank's site to find out what their target for inflation is. Also, many central banks target 2% year-over-year inflation. So if rates are rising above this level and the central bank expects it to continue, then the central bankers will raise rates.

On the other hand, central banks lower rates when the economy slows, employment falls, growth stalls. They lower rates to give the economy a "shot in the arm." Usually, this is bad news for the currency because no one wants to earn less and less on their money.

Recap: Watch the CPI levels to see if they are climbing or falling. Find out if they are above or below the central bank's comfort levels. This will give you an idea of where interest rates are headed.

If rates are expected to rise, in general, buy that currency. If rates are generally expected to fall, sell that country's currency.

Sean Hyman, Currency Director

Age : 34 Joined : 09 Jan 2008 Posts : 5 Location : lagos

When interest rates are rising, traders convert their currencies to that country's currency, and drive that higher-yielding currency higher.

Inflation = Higher Interest Rates
So how do you know when a country is about to raise their interest rates? You look for countries with high inflation. Central banks raise interest rates to tame inflation so it doesn't get out of control.

Central Bank of Nigeria have been raising intrest rates for years but inflation show no sign of dropping.dont you think its better to lower interest rates for growth,without that much emphasis on inflation?

Subject: Re: Forex 101: What Moves Currencies? Sun May 18, 2008 2:44 pm

wud the earthkuakes and cyclones in china and burma affect japenes yen ?