Fundamental Factors behind Major Currencies

Jumat, 03 Juli 2009

Every currency traded in Forex is influenced by the conditions in its country of origin, and the external relations that affect its value. Economic Indicators (GDP growth, import/export trade accounts), social factors (unemployment rate, real estate market conditions) and the country’s central bank policy are the factors that determine the currency value in the Forex market. Each one of the six major currencies has its particularities, and we are going to analyze the fundamentals that drive the currencies individually.
The U.S. dollar (USD) is the most traded currency in the Forex market. It is also used as a measure to evaluate other currencies and commodities. The reserves in USD are by far the largest being held by different nations, and they compose 64% of the world reserves. Globally speaking, the fundamentals that drive the U. S. Dollar are several. Since the largest amount of metallic commodities and the oil are mostly traded with prices in USD, significant demand variations in these markets will reflect directly on the currency value, as it happened in 2008 with the EUR/USD reaching 1.60, being the oil price a big contributor for this event. In the domestic market, the biggest factor that has been moving the dollar are the industry indicators and the real estate boom, and both were caused by an unsustainable credit system which could not be paid, causing a domino effect in the United States economy, and consequently, worldwide. During the last few years, the USD has been losing ground for other currencies, thanks to the credit bubble, and erroneous social policies, but it will still remain as one of the most powerful currencies for an undetermined period of time.
The euro (EUR) is by far the newest currency traded among the major pairs traded on Forex markets. It is used by 16 European Union member countries and it tends to enlarge during the next few years. The fundamental factors that move the Euro are often based on the strongest economies using the new common currency, such as: France, Italy and mainly Germany. The countries’ indicators regarding export trade, inflation and unemployment rate tend to have a high impact on the EUR movements, considering that countries such as Germany are larger exporters of manufactures and technology. Europe still remains an energy dependant from the Russian gas and the Middle Eastern Oil, making higher demands for these commodities to have a negative reflect on the European Union common currency.
The pound sterling (GBP) is the national currency of the United Kingdom, and the fundamental factors that move it are as complex and variable as the British economy and its global influence. The London commodity market plays a fundamental role in the GBP trends, being a reference for oil and gold trading. Nevertheless, as a powerful and globally dynamic economy, the United Kingdom indicators, social situation and the housing sector are perhaps the main determinant factors for the GBP price. Lately, the British economy has faced inflation issues, which led the interest rates to be cut, industrial recession, and other domestic factors that made the trading movements to naturally flow from the GBP towards other strong economically backed currencies, such as the EUR.
The Japanese yen (JPY) is the strongest and by far the most traded currency in the Asian market. Japan’s economy is mainly orientated to the industrial production exportation, and the economic situation of its main commercial partner, the USA, tends to have a direct influence on the JPY market. The JPY is a low-yield currency, being the GBP/JPY the most volatile pair traded on Forex, usually the scalper’s favorite one.
Switzerland is a small country located in the European Alps, yet, its strong international trade and money influx, made the Swiss franc (CHF), one of the main currencies traded on Forex. The CHF is often preferred by low yield investors. In times of financial instability, such as for the last years with the USD, many traders choose the CHF as a safe investment. The CHF trends can be often compared to those of the gold, increasing their value while other markets’ tends to depreciate during economic downturns.

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