The Economic Impact on Forex Trading

By: Justin Stewart

Forex trading is something that many people to not understand. While they hear of the dollar "fluctuation", they never quite understand the process or what it means. Forex trading allows banks and other agencies and entities to trade actual currency from around the world on a 24 hour basis (minus weekends). The market moves over $3 trillion a day, so it is easy to see why the process can be confusing and overwhelming at best. While there are multiple factors that affect the direction of the movement of money on the forex market, the economic factors of the country can help to understand some of the movement on the forex market. Understanding these factors and seeing how they play out can help you understand how and why people play the "forex" game to try to achieve returns on their investments.

Government Budgets

The budget of a government can go multiple ways. If the budget is working well, and the country has great fiscal policy, the country's finances will be in a surplus, meaning that they are taking in more than they are using. If a country is not necessarily in an amazing place financially, and is spending more than they are taking in, this is known as a deficit. The forex market will react to deficits and surpluses; a growing deficit will turn the market off to that currency. A country that lowers it deficits, or continues to grow on it's surpluses will find that the forex market will react positively.

Trade Level Balance

The money going between countries and their currencies plays off the supply and demand idea for a country's products. An increase in demand for a currency means that there is an increase in demand for the country's product and services. If a nation is competitive, there will be a surplus in the trades of the country's currency. This works just as a country's own economy, as an increase in trade will have a greater positive aspect on the currency of the nation. Forex trading relies on trading between countries and currencies, as many national banks are involved.

Inflation Trends

Inflation can actually affect more than just the country that is having the inflation problem, believe it or not. Forex trading depends on the inflation that is seen in a country. If a country, for whatever reason, has high inflation levels, the currency of that country decreases; this decrease is seen as a negative in the forex market. There will be a decrease in demand for that type of currency based on the perceived inflation rates.

Inflation is an interesting beast, however. Central banks (for a government, country, or the world) will try to play with interest rates in order to help stop inflation. Forex markets look for this intervention, as it means that they can get a currency for lower that will quickly rise once the central bank steps in.

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