Economics of Foreign Exchange & Global Finance

Analyze factors that affect exchange rates to improve your bottom line.

The foreign exchange market is critical for financial globalization. Foreign exchange rates serve as leading indicators for capital flows across borders. Identify foreign exchange rate trends before making financial decisions.

Identification

Appreciating exchange rates for a particular currency parallel the home nation’s economic growth. High demand real estate, business assets and stocks support strong exchange rates. Conversely, lower exchange rates characterize recession and political instability.

Features

Foreign exchange rates track the interest rate environment. Capital flows into nations that feature higher prevailing interest rates, as investors covet additional investment income. High interest rates may also signal that the domestic money supply is relatively low. Low money supply levels increase currency valuations.

Considerations

Countries with strong export economies, such as China, favor weak exchange rates that translate into cheaper sales prices for overseas customers. Alternatively, high exchange rates combat inflation at home, because consumers now have more purchasing power for imports.

Warning

Foreign exchange markets and globalization heighten contagion risks. In contagion, one isolated event quickly transitions into regional worldwide economic panic. In 2010, Greek sovereign debt default concerns led to the European financial crisis.

Strategy

Currency derivatives, such as options, are tools to manage global financial risks. Currency derivatives help people negotiate predetermined exchange rates over set periods.

References

• Federal Reserve Bank of New York: Foreign Currency Exchange
• Investopedia: Currency Option
• Investopedia: Contagion

Resources

• MSNBC: Europe's Financial Crisis Intensifies
• Investopedia: Foreign Exchange Markets