Inflation. When inflation rate is down, banks would cut down interest rates to encourage economic activities. On the other hand, during high inflation, banks would increase the interest rates to discourage lending and spending. Hiking up the interest rates boosts the value of the currency. This is true in US where rising of interest rates by the Federal bank would encourage investors to capitalize on higher returns. What is the better way to measure inflation in a certain country rather than to refer its consumer price index? Each country may have different ways of measuring and inflation indication.You can actually identify the inflation rate by watching the housing market in UK which is considered more accurate representation.
Who exactly determines the rates? For the US dollar, the trader would be wise to watch closely interest rate decisions by the Federal Market Open Committee. FOMC meets regularly each year to determine key interest rates and to decide whether to increase or to decrease the money supply through the buying and selling of government securities. In order to know more about these decisions, the trader could read up on the FOMC meetings minutes released three weeks after the date of each policy decision. Speculations of a hike in interest rates would probably boost the dollar up. Playing similar roles is the Europe Central Bank, Bank of Japan, Bank of England and the Swiss National Bank. The Bank of Japan's role is unique in the sense that it has to monitor the Yen and form monetary policies that will keep their exports from becoming too expensive.
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Currencies also influence each other. As mentioned above, the Bank of Japan has to pay close attention to the market to make sure that their currency remains weak in order to maintain their high export rates. This is due to China's reluctance to revalue the Chinese Yuan thus making China's products more competitive. Meanwhile, the Euro is nick-named the anti-dollar, meaning that a fall in the dollar value will boost up the Euro. This is due to the Euro becoming the up-and-coming option for reserving currency as there is a possibility of the European economy becoming much stronger and also the chances of the dollar depreciating are risky higher due to long term deficits in trade balance. Plus, Japan holds a large percentage of their reserves in the US dollar.
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How Does Inflation Affect The Currency Trading?
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