How do interest rates affect the currency movements?
Read the answer I gave you to your market movers question over in Newbie Island:
http://forums.babypips.com/newbie-island/17781-market-drivers.html
hi mitjar…if i’m not wrong when the banks increase their interest rates, the pretend to reduce the amount of money in the markets, which is done to avoid inflation rates to grow without limit, cause that situation will make the economy to slow down because of the high prices. In other words, that will result in a lack of liquidity…which at the end will end in less open orders in the forex market.
right now…the banks are planning on cutting the interest rates so the people could pay their debts easier, and of course it will result in more loans at the banks because of the low interest rates…
Risk management is the answer.
As investors seek to strike a balance between profitability and the risk they assume, they want to participate in markets where profitability is higher. So when yields go down for example in countries like ours, they take their money to the Euro Zone or Asian or Latin American markets where their money can make more money.
The profitability goes down when interest rates that central banks handle (ECB or FED) go down also. So news as a fall in such fees generates massive sales of the currency of that country. Sales generate a massive price falls because the offer is larger. That’s when the opportunity presents.
As GBLilleyUSMC said �High interest rates cause global money to flow into a country. Inversely, low interest rates cause money to flow out�.
GBLilleyUSMC: what does mean �usually short term IMO� International Meteor Organization? Jeje.
Hello Katherine! good to have you here on this discussion girl! i’m not sure about what you meant with your post…would you explain it to me a little bit if your don’t mind?? thanx!!
Let me try to explain and prove I really learnt about it.
When interest rates go down the incentive to acquire consumption credits for customers grows. That pushes the investors to bring the money to that economy and the currency increase proportional. For example the bank of japan has its interest rates in 0.3% the lowest in world
If the European Central Bank as expected cuts rates for the third time in two months, and if the op 50 basis points from borrowing costs the rate would be the lowest at 2.75%.
For this week we could expect one rate cut more. Now the concept of EuroZone is changing because they are losing energy and consumers are slumping.
Nevertheless these actions might not be enough to convince consumers.
The situation is difficult to ECB. As you say 2.75% would be reached
[B]�European Central Bank Rate Decision - December 4[/B]
[I]A record drop in Euro-zone CPI and rising unemployment leaves the odds in favor of rate cut by the European Central Bank on Thursday at 7:45 ET. In fact, Credit Suisse overnight index swaps are now fully pricing in a 50 basis point reduction by the ECB, and a 40 percent chance of an even more aggressive 75 basis point cut. Meanwhile, a Bloomberg News poll shows that economists expect the former. This easily leaves the decision as one of the most important pieces of event risk this week, but traders will also have to look out for comments by ECB President Jean-Claude Trichet during his post-meeting press conference. Mr. Trichet is one of the most opinionated central bank chiefs around, and suggestions that recession will last longer than previously expected in the Euro-zone have the potential to lead the euro far lower.[/I]�
Too much cuttings maybe these times don�t affect forex trading.
I am afraid I am wrong but I want to get it clear anyway, besides the stupid question is the one not asked. Aren’t the banks involved on the calculation of spreads on brokers? Isn’t it supposed to affect liquidity?.
What do you mean exactly?
The idea is to encourage investment get stronger is this crisis to raise currency power that is directly related with forex
As the global economy worsens, analysts said investors will continue to snap up the U.S. dollar and yen as they pare back their holdings of risky trades financed by both currencies’ cheap rates.
well though, if I’m not wrong, the banks do not have that much discretion to set the spread that you are paying to your broker, it is a matter of each of them, so the best would be to get one with a tight spread, or am i wrong?