Foreign currency rates are dependent on currency exchange rate. A currency exchange rate is a rate at which currency of one country is exchanged for the currency of another country. Therefore, it is like any other asset or commodity which you buy at certain price. Price of a currency can be decided by two ways: a fixed and floating rate. A fixed or a pegged rate is the rate that is decided by the government or the central bank. These rates are official exchange rates and are often decided against major currencies such as the U.S. dollar, the euro or the yen. The government always tries to maintain the local exchange rate by buying and selling its own currency in the foreign exchange market to maintain foreign currency rates. And, it is due to this requirement to maintain the rate; the central bank of any country needs to maintain high level of foreign reserves. The central bank uses this reserved amount to release or absorb the extra funds into or out of the market. These official currency exchange rates can be adjusted if and when necessary.

Another factor on which foreign currency rates are based is floating exchange rates. As the name suggests, floating rates will change now and then. These rates are decided by private market through the law of supply and demand. These rates are also termed as self-correction because the moment supply and demand changes, these rates get changed. For example, if the currency of your country is not in demand in foreign exchange market, then, it is natural that nobody wants to buy it. This will automatically decrease its price. Having said this, essentially, the nature of all currency exchange rates is fluctuating. The reason is currency rates are exposed to various factors that keep on changing. Those factors can be classified as socio-economic and geo-political issues. One of such socio-economic factor is inflation. The heavier the inflation rate is, the more down the currency exchange rates. Such factors then force the central bank to reevaluate the foreign currency rates. In such a complex scenario of dealing with foreign currency rates, one has to adopt various methods and programs to get the best returns on investment. These methods can be categorized into two approaches: fundamental approach and technical approach. Fundamental approach covers wide range of data whereas technical approach is more about approaching smaller subset of data.

Fundamental approach is consisted of many economic variables including the GNP, trade balance, inflation rates, unemployment, productivity indexes, consumption, and trade balance. This method is essentially based on a model called “structural model”. This model considers the statistical features of the data collected. When the traders are resorting to this method, following major difference between the anticipated foreign currency rates and the prevailing or present rates, the programs generate strong trade signals. This way trader is informed about the huge difference due to mis-pricing. In technical method, past data is examined with an attention on price information. This generally depends on moving averages or momentum indicators. When the data is compiled, trading signals are generated to guide the investors. Though, foreign currency rates are complex, some methods and techniques make it easier to handle.