Friday, May 22, 2009
by Tim Evans of Lind-Waldock
We all witnessed a global equity market meltdown of equity prices over the last 12 months. During the same time frame, we saw a boom-and-bust cycle in commodities. In my opinion, we are now in the middle of a significant shift in dynamics for currency markets throughout the world.
Just like any market, the value of a currency is determined by fundamental supply and demand factors. On the demand side of the equation, a currency is more valuable when its respective economy is growing. If the economy is active and money is flowing into a country, this is viewed as positive for the country’s currency. To put it simply, an active and growing economy creates demand for the currency.
Interest rates also have a strong affect on the value of a currency. The old adage in the trading world is “money chases yield.” Money will seek the highest return by flowing to a country with higher interest rates. Therefore, demand will grow for the currency in the country with higher interest rates. Higher demand often leads to a stronger currency. (more)
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