Currency Wars: “Beggar Thy Neighbor” Policy
February 12, 2025
Amazon and Netflix are two of the most profitable firms in the entire world. For instance, last year, Amazon alone made over $12 billion in profits. However, it paid $0 in taxes! To make matters worse, the company was owed money in the form of tax rebates. This means that the federal government was actually […]
The retail sector is often considered to be a part of a single industry that has similar characteristics. However, this is not necessarily the case. It needs to be understood that the retail sector is very diverse. There are many different types of businesses which operate in this sector. These businesses have considerably different characteristics. […]
Financial markets have their own terminologies. The Forex market has a number of terms which it shares with other financial markets but which mean different things in the Forex market. Also, there are some words which are completely unique to Forex. In this article, we have a closer look at Forex terms. These terms will […]
The United States banking industry and the economy in general was rocked by the Savings and Loans crisis in the 1980’s. The savings and loans associations had been an important part of the United States banking system. Hence, when one out of every four savings and loans in the US went under water, the nation […]
The investment banking industry is often referred to as if it were homogenous. However, this is not true at all. There are many different types of investment banks around the world. These different investment banks can also be categorized in different ways. However, these banks are most often categorized by the types of financial products […]
The Foreign exchange market is far more complicated as compared to stock or bond markets. Predicting the foreign exchange rate includes predicting the performance of entire economies. There are a multitude of factors which come into play when exchange rates are being determined. This article lists down and explains some of the important factors which have a major influence on the exchange rates.
Foreign Exchange markets are also financial markets. The price reflected in any financial market does not reflect the price of today. Rather, it reflects the expectations about the future based on the information that we have on hand today. Therefore, the foremost and important determinant of Forex rates between any two countries is expectations about the future.
The term “expectations about the future” sounds like a vague and generic term. The next question arises, “expectations about what?” The remainder of this article will explain the various factors that influence the exchange rates.
Exchange rates are basically a comparison between the policies of two countries. It is essential to understand that exchange rates are not absolute rather they are relative. The following factors are considered amidst many others while comparing the monetary policies of any two countries.
Therefore, Central Banks become extremely important participants in the Forex market since they control the monetary policy which is one of the biggest determinants of the value of the currency.
While monetary policy is controlled by the Central Bank of the country, the fiscal policy is controlled by the government. This too has important implications because it signals the forthcoming changes in the monetary policy.
However, it needs to be understood that once again there is a relative comparison between the public debts of the two countries in question. Absolute amounts may not matter as much!
Political stability of the country in question is also of prime importance for Forex rates. This is because modern monetary system is a system of Fiat money. This means that money is nothing except the promise of the government. Therefore, if there is a danger to the government, there is a danger that the promise itself may be worthless once a new government takes over. It is possible that the new government may want to issue a new currency of its own! Therefore, whenever a country faces a geopolitical turmoil, its currency usually takes a beating in the Forex markets.
Lastly, the Forex market is extremely speculative in nature. This is because Forex provides the leverage for investors to amplify their trade several times using borrowed money and then invest in the markets. Therefore, sentiments take over the Forex market more than they take over other asset markets because of the availability of easy money.
Hence, just like all other markets, Forex markets are prone to irrational exuberance and they too can distort exchange rates in the short term creating long term investment opportunities.
Many other factors like the price of commodities such as gold and oil also play a vital role in the determination of Forex rates. However, that will be discussed in a later article in this module.
Your email address will not be published. Required fields are marked *