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EXCHANGE RATES
Currency exchange rates fluctuate for many reasons. If a country experiences an increase in either speculative or transaction demand for its currency, the relative exchange rates will go up.
Good news such as the launch of a high profile space mission or new trade agreement will increase demand for a currency and positively impact its trading rate. On the other hand, negative news such as a terrorist attack or natural disaster can cause a currency to devalue.
Transaction demand is impacted also by the country GDP, key businesses and deals, and unemployment rates. Central banks usually accommodate speculative demand by adjusting interest rates.
How are Foreign Exchange Rates Determined?
The Forex market is a relatively new market, and just emerged when currencies became "floating" currencies against each other.
Determining foreign currency exchange rates is a course offered by many business schools - a complete description of this subject would take many volumes! In simple terms, foreign currency exchange rates are determined using purchase power parity between the two countries, or how much does a similar item cost in each currency? There are many factors influencing currency rates including political developments, central bank policies, trade patterns and speculators.
Interest rate parity is another factor, as is the level of exchange controls or protection each country has in place against unfair trade.
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