Foreign exchange is a commodity. Like all commodities its prices can fluctuate because of a wide range of factors. Understanding why and when these price movements occur is how an investor can profitably buy and sell. In this short article we will examine some of the factors that can affect the value of a specific currency.

One key factor is interest rates. When the interest rate of a currency goes up faster than that of the currencies of its trading partners it becomes hot. Investors buy up the currency to take advantage of this high rate. This increased demand for a currency will bump up the price.

Another factor is the rate of inflation. If an economy is experiencing a higher inflation rate than that of its trading partners then the currency of that country loses value relative to that of its trading partners. This increased inflation decreases demand and the price of the currency drops. The corollary is that currencies with lower inflation rates than their neighbors can experience increased demand.

The rate of exports impacts a country's currency rate vis a vis its trading partners. Countries that export more have more highly valued currencies than countries than countries that do not export as much. If a country increases its exports then its currency is likely to increase in demand and in price. Sometimes countries combat this tendency by artificially devaluating their currency in order to maintain high demand for their goods. China is often accused of systematically undervaluing its currency to keep a high demand for Chinese exports.

Sometimes political and psychological factors are believed to have an influence on the demand for certain specific currencies. For example, the Swiss franc and the US dollar are considered "crisis currencies." People buy these currencies during wars or time of uncertainty and thus their demand goes up for purely psychological reason. They are considered "safe."

Another factor is central banks consciously manipulating the market. Sometimes the central bank of a country may try to increase or decrease the price of their currency either by buying their currency or flooding the market with their currency. This is known as a "Central Bank Intervention." This may be done in order to increase exports among other reasons. However, this generally does not have a long term impact.

In summary, currencies are seen as being impacted by either technical factors or fundamental factors. Technical factors include capital movement, relative interest rates, inflation rates, and exchange rate policy and intervention. Technical factors involve government fiscal policies surrounding currency and its movement.

Fundamental factors are more or less basic economic indicators. Generally speaking, the stronger the economy, the stronger the currency. By looking at inflation, unemployment, capital utilization, balance of trade, deficit levels, and GDP one can gain insights into whether currency will increase or decrease in value.

Forex traders must have a solid grasp of both fundamental and technical factors in order to effectively forecast both short term and long term currency trends. One must grasp basic economics and basic monetary policy in both the countries involved in the exchange