Currency variations are an inevitable product outcome of the fluid exchange rate system that is the norm for most of the world’s key economies. The exchange rate available between two currencies is driven by copious causes and dynamics. The availability of the currency, the inflation and interest rates in the relevant country and a whole host of other factors contribute to its relative strength or weakness on the world economic stage.
The state of a currency can give a real insight into a country’s financial standing. While most people only occasionally conduct transactions in a foreign currency for example, buying holiday money for the forex trader it is extremely important to keep a weather eye on currency fluctuations and how they may affect the market in both the short and long term.
Strong versus weak
Many of us labour under the illusion that a strong domestic currency is entirely positive. However, this view is limited and fails to take into account the fact that a disproportionately healthy currency can detract from the strength of an economy over time. Conversely, a comparatively ‘weak’ currency can strengthen certain industries, particularly tourism and lead to long term economic growth in such sectors.
The performance of a domestic currency can server as a useful indicator of the overall economic strength of a country. Interest rates, the employment market and the cost of living are all affected by both the current and predicted value and performance of the relevant currency.
The foreign exchange market is inevitably affected by the continuous ebb and flow of the world’s major currencies. This movement can be driven by a number of factors including natural disasters, war and politics. It is inevitable that any currency can only ever be as strong as the overall economic performance of the country itself. Since many of the factors which affect currency are by their nature unpredictable, it can be hard to get an accurate picture.
Forewarned is forearmed
Any forex trader worth their salt will keep an eye on the currency of any country of interest to them. Keeping up-to-date with current events can also be vital when planning future trades and will help to avoid avoidable mistakes. A change in political leadership or the outbreak of war can have devastating short term consequences on a currency and it takes real dedication to keep on top of the multitude of factors that come into play when predicting the markets.
In the fast moving world of foreign exchange trading, knowledge does not necessarily mean power, but keeping on top of fast moving world events can certainly lead to the avoidance of unnecessary risks. It is often said that the successful forex trader is one with a healthy respect for risk. Gaining a sound understanding of the factors that contribute to the fluctuation of the foreign exchange rate is one way of ensuring that you enter into trading with your eyes wide open.