Quote:
Originally Posted by grmike
what's the main driving force behind a currency's rise or decline ?
i know that interest rates play a role but not exactly sure how.
how much of an effect do oil and other commodities have on exchange rates ?
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There are too many variables involved to point to a main driving force. However, strictly in fundamental terms, I would point to relative productivity, sometimes measured by purchasing power parity, but some years ago I developed my own method.
Clearly currency rates can deviate significantly and for long periods from what measures of relative productivity may indicate. Again, there is any number of variables at play.
All other things being equal, a higher interest rate makes it more attractive for foreigners to hold fixed-income assets in that currency.
But more often than not, all the other variables are not equal, and interest rate differentials will be just one factor influencing exchange rate movements.
Most currency traders are young and play it on intuition.
You can do currency plays based on fundamental analyses, it may work out, it may not.
Having said that, I don't think you can count the USD out, say, five years from now. The eurozone has structural problems too and the US could, conceivably, turn some of its dollar-negative policies around in the medium-term.
Good luck!
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