Few people keep track of changing currency values. Day-to-day and month-to-month prices remain steady, except for annual or bi-annual increases. Foreign exchange or forex fluctuations – how one country’s currency shapes up against another’s – rarely feature unless the average person takes a trip abroad, buys something online from another country, or starts trading in forex. However, local economies and forex rates go hand in hand.
Movements in the forex arena directly impact the local economy and even influence something as menial as the price of bread. Similarly, in-house and international political climates shape the well-being of a specific currency and affect the greater forex market.
What is the forex market?
The forex market, often simply called FX, is the worldwide arena where people and organizations exchange foreign currencies. As the largest financial market globally, it turns the wheels of modern-day economies, influencing everything from the price of food in the US to property values in Europe.
As exchange rates are in constant flux, anyone trading in the forex market needs to keep a finger on the pulse of highs and lows, trends, predictions, and domestic and international events.
The forex market and local economies
Weak or strong currencies affect a country’s macroeconomics and vice versa. This means a local economy’s performance and behavior and its currency are closely linked.
National banks adopt their monetary policies in line with a local currency’s value. This, in turn, causes a ripple effect that touches the socio-political and socio-economic aspects of everyday life.
Forex and the price of merchandise
Global trade is widely accepted in today’s digitized societies. Forex dictates the value of imports and exports – a strong local currency means goods can come into a country at cheaper rates, while a weak one increases the price of international merchandise.
For example, homegrown US nuts will be cheaper in the States than they would be in Africa, with its significantly weaker currencies.
Inflation and interest rates
If a country relies on imports to keep its consumer market going, an inferior homeland currency will spike inflation rates and, as a result, the cost of goods. This scenario often causes a domino effect as it spurs banks to raise interest rates in a bid to back global currency performance.
Forex and the job market
Strange as it sounds, a weak local currency can instigate economic growth by indirectly creating a demand for local goods (as the imported ones become too expensive). Ironically, a strong local currency can hobble industrial competitiveness and economic growth.
Forex and investments
Forex ups and downs directly impact the performance of investment portfolios. Robust currencies can slow the demand for goods or commodities. This affects the earnings and market values of local producers.
The forex market is hugely influential, whether a person actually trades on it or not. Understanding how currencies compete and behave can help with financial planning and ensure that /you or your business are in the best position to make financial decisions.