Forex and the Global Economy

For beginners, the forex market is new and exciting. And, it should be. When introduced to the available leverage and extreme flexibility that foreign exchange trading offers, it becomes clear to the new trader why forex currency trading should be a part of almost any portfolio. While there are many benefits built into the forex market, it’s important to note that consistent success goes to the traders who are adept at analyzing the market and who have a clear understanding of what causes forex rates to change.

While this is a new trading arena to many, the foreign exchange as a market has been around for quite a while. Until World War I, the value of gold was the standard for determining the value of one currency against another. Since then, a number of systems have been adopted, and then subsequently rescinded. Today, gold is no longer used to determine the value of currencies, and the global currency market is monitored by the International Monetary fund, which is part of the World Bank Group – an association of five international agencies that oversee the financial systems of the currencies traded in the forex market.

Foreign exchange can be thought of as a snapshot of the global economy – or at least of the economies of the countries who participate in foreign exchange. Events that affect a particular country’s economy – unemployment, drought, war – can and does show up in how that country’s currency holds up against other currencies. For example, if United States’ unemployment figures dropped rapidly one week and Great Britain’s figures remained steady, all other things were equal, the U.S. dollar (USD) would hold stronger against the British Pound (GBP) than it had the week before. In essence, the value of one currency against another is indicative of the state of the economy at the time.

This is a rather simplistic view – nothing in forex is ever that simple. People new to the scene need to not only learn exchange rates, but also learn forex as a part of a larger whole. Experienced traders who analyze the market on a daily basis have learned that the forex market has a life of its own at times, but more often than not, the link between the foreign exchange market and the global economy is a direct one.

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