Monday, December 18

What Determines A Currency Strength?

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If the quaterly earning reports are good or are expected to be good, the stock price will rise in the market.

However, if rumours spread about some management problems in the company or negative stuff like a bad expected earnings report, the stock price will start falling. Investors will start dumping that stock in the market. In much the same manner, think of the currency as the stock and the country as the company.

When there are good reports about the GDP growth of a country and the growing exports of that country, the currency of that country will start appreciating. When the political leadership at the helm of affairs in the country is considered to be mature, savvy and honest, it gives positive signals about the currency of that country to the market.

But on the other hand, rising unemployment, growing budget deficits, reports of widespread corruption in the country and other negative factors like the political unrest tend to undermine the performance of the currency of that country. Determining the strength of a currency is more linked with the fundamental analysis.

Fundamental analysis is a subject that deals with determining the long term trends in the currency market. It analyzes the myriad of economic factors that are working in any any economy to determine the future strength or weaknesses in that economy and links those with the strength or weakness of the currency of that economy.

For example, unemployment is considered to be a very important factor for an economy. When the NFP report is released every month, it makes the dollar traders quite jittery and nervous as these unemployment figures tend to negatively or positively affect all the currency pairs involving USD.

Another thing that is important to understand in determining the strength of any currency is that you only judge the strength or weakness of a currency relative to another currency as a trader. For example, USD is losing value. There are many reasons but the most important is the dollar printing that is being done by the FED. This feeds the inflationary spiral in the economy. Rising inflation always depreciates the currency as it starts losing value.

But then when trading EURUSD, you need to look at the economy of the EURO zone. Money constantly keeps on flowing back and forth between US and the EURO zone. When the US economy works, money starts flowing from Europe into US appreciating USD and when US economy falters, investors transfer their investments to the EURO zone, depreciating the USD. Whatever, you need to learn fundamental analysis in order to guage the strength or weakness of a currency relative to other currency.f


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