International currency markets Essay
International currency markets are subject to interest of investors and financiers, who attempt to maximize their profits due to the difference in the exchange rate and changes in exchange rates. In this regard, George Soros was one of the most successful financiers, whose profits rely heavily on his investments in different currencies and using the exchange rates difference to maximize his profits. However, currency exchange markets are highly risky, for a number of factors affect the situation in currency exchange market.
In this respect, while operating in international currency exchange markets, it is necessary to take into consideration multiple factors. First of all, currency exchange rates are vulnerable to consistent changes under the impact of political factors. What is meant here is the fact that political instability can provoke a steep decline in the currency rate. However, it is often difficult to predict the political situation, especially in developing countries. In such a way, investors face substantial risks, if a political crisis outbreaks because it provokes the drop in currency rate.
In addition, investors should take into consideration the economic situation in the target country because the currency rate depends on the economic situation. The analysis of the economic situation is very important to assess the risks related to investments in the target currency. As a rule, economies develop in cycles. Each cycle has different stages of rise and decline of the national economy. As a result, investors should assess adequately the current stage in the economic development of the target economy. At the same time, a financial scandal that outbreaks can also affect the currency rate. For instance, the failure of a large corporation can provoke the financial crisis that affects the situation in the national economy. As a result, the currency rate can drop substantially.
Furthermore, central banks of each country regulate financial policies that affect the currency rate. The main point of central banks is to maintain a stable currency rate. They use interest rate to prevent inflation or they can devaluate the national currency decreasing interest rate that stimulates bank loans and provokes high inflation. As a result, the currency rate drops.
Investors should also take into consideration the trade balance in the country. In fact, the negative trade balance of the country means that the country has the deficit of the current account. Hence, the deficit in the trade leads to the decrease of the currency rate because the country grows dependent on the import and has to borrow money to cover the deficit in the trade with other countries. In addition, the country has to buy foreign currency, as a rule the USD, to cover the deficit of its trade balance.
Furthermore, investors should take into consideration the inflation rate because the high inflation can undermine the currency rate. In fact, often countries devaluate their currency to make their products and services more competitive in the international market. Hence, the rise in inflation can affect the currency rate consistently.
Thus, investors should be very careful while operating in international currency exchange markets because they are risky, although they can bring considerable profits in case of successful investments.