Monetary Flows
Large mergers and acquisitions can create an often temporary demand for a particular currency which can cause the currency to strengthen. The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. Large trade deficits (imports > exports) usually have a negative impact on a nation's currency.
Economic Policy
Fiscal policy which is essentially the way a government chooses to manage its revenues (tax) and expenses (spending on health, education and defense). The difference between the two is the government deficit/surplus. A country’s currency usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits.
Monetary policy which is the way in which a government's central bank influences the supply and "cost" of money. The cost of money is reflected on a currency’s interest rate while the money supply is managed with the buying or selling by the central banks of government bonds. High real interest rates (nominal interest rates less inflation) usually tend to attract capital causing a currency to strengthen. The level of interest rates also affects the domestic economy in that a high interest rate tends to slow economic growth and inflation, while in periods of low growth or deflation central banks use low interest rates to stimulate growth or bring inflation back to target. Adding money supply (buying government bonds back from the market-quantitative easing) is used to stimulate growth and inflation, whereas withdrawing money supply (selling government bonds) is slowing growth and inflation. Excess money supply tends to weaken a country’s currency while low money supply tends to strengthen a country’s currency.
Large mergers and acquisitions can create an often temporary demand for a particular currency which can cause the currency to strengthen. The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. Large trade deficits (imports > exports) usually have a negative impact on a nation's currency.
Economic Policy
Fiscal policy which is essentially the way a government chooses to manage its revenues (tax) and expenses (spending on health, education and defense). The difference between the two is the government deficit/surplus. A country’s currency usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits.
Monetary policy which is the way in which a government's central bank influences the supply and "cost" of money. The cost of money is reflected on a currency’s interest rate while the money supply is managed with the buying or selling by the central banks of government bonds. High real interest rates (nominal interest rates less inflation) usually tend to attract capital causing a currency to strengthen. The level of interest rates also affects the domestic economy in that a high interest rate tends to slow economic growth and inflation, while in periods of low growth or deflation central banks use low interest rates to stimulate growth or bring inflation back to target. Adding money supply (buying government bonds back from the market-quantitative easing) is used to stimulate growth and inflation, whereas withdrawing money supply (selling government bonds) is slowing growth and inflation. Excess money supply tends to weaken a country’s currency while low money supply tends to strengthen a country’s currency.
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