How Are Currency Prices Determined?

Currency prices are affected by a large matrix of constantly changing economic and political conditions, but probably the most important are interest rates, government intervention, economic conditions, international trade, inflation or deflation, political stability, and in some cases, armed conflict. Governments sometimes actually participate in the foreign exchange market to influence the value of their currencies. Governments do this by flooding the market with their domestic currency in an attempt to lower the price or, conversely, buying in an effort to raise the price.

This process is known as central bank intervention and it can result in dramatic, if short-lived, movement for the currency involved. See the USDCHF chart in Figure as an example. Prices soared 500 pips in less than one hour.

The USD appreciated over 500 pips in just one hour on September 6, 2011. This represents a $5,000 move on a standard 100,000-lot trade of the USDCHF.

[caption id="attachment_12935" align="aligncenter" width="550"]Swiss Central Bank Intervention in the CHF Swiss Central Bank intervention in the CHF[/caption]

By Michael Duane Archer
Michael Duane Archer has been an active futures and FOREX trader for more than 35 years. He has worked in various advisory capacities, notably as a commodity trading advisor, registered SEC investment advisor, and branch manager for Heinold of Hawaii. He currently trades FOREX and futures and is involved in several technical analysis research projects.

Copyrighted 2016. Content published with author's permission.

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