Currency rates are set by the relative value of one currency in terms of supply and demand for that particular currency and the underlying dynamics are related to movements in international trade and also relate to the perceptions of those who trade in the currency market place. Whereas there is a whole industry emerging around the prediction of movements in currency rates, with a view to profit with the trades going on, there will always be element of chance about what finally determines a currency rate – the probability that a trader will act “randomly” or emotively when conducting a trade.

For the most part, currency rates, since based on the actual relative power positions of one currency as compared to another, tend to be stable over time, or will tend to move for obvious and predictable reasons. For example, it is expected that the currency pair of US Dollar and Australian Dollar will move towards parity perhaps by the end of next year – as a result of relative market strength, or at least the perception of it, for the two countries involved.

In the day to day market, there are peaks and troughs which wholly relate to immediate supply and demand for the currencies involved – something like the waves on the top of the ocean – with long term trends being more like the tides. Generally speaking a strong currency is one where the country issuing the currency holds a strong position in the area of international trade – currency rates will stay firm and eventually appreciate against other currencies where there is a strong demand for the currency of a particular country.

A strong demand for any particular currency is related to that country being active in the export market and also to people wanting not only the products of a country, but to invest in that country’s assets. If an economy is strong enough to maintain relatively high interest rates, as opposed to other countries, then investment capital will be attracted to that country. This creates a high level of demand for the currency so that investment can be made – maintaining a high interest rate will attract foreign investment and keep a currency strong. Currency rates are generally indicative of the relative economic strength of a country but can be subject to fluctuations related to short term situations rather than to long term trends.