How Currencies Help Or Hurt Your Investments

Currencies can impact your investments more than you think, and in a more complex way than many understand. Here’s an overview:

What Makes A Currency Strong?

Currencies can rise or fall in price just like a pound of bananas at the supermarket. Most currencies are traded every day and though there are many aspects to what determines currency movements, like many prices, often it comes down to supply and demand. If there are more buyers than sellers for a currency, the price will rise (relative to other currencies) and vice versa. Of course, unlike bananas currencies are typically quoted in other currencies, a U.S. dollar is always worth $1, so its often quoted relative to foreign currencies such as the Euro, the Japanese Yen or the British Pound.

So, what determines supply and demand? Well, to generalize: countries with lower inflation, higher interest rates, attractive businesses to invest in, a stable and growing economy, and attractive products to export will typically have a stronger currency because these factors encourage purchase of a country’s currency.

The Case Of The U.S. Dollar

For example, the U.S. dollar is generally considered a strong currency because inflation, has in recent history, been low. This means that the value of a dollar is fairly stable; it does get eroded over time by inflation, but to a lesser degree than in many other countries. The U.S. has a vibrant export sector, so money is often ultimately ‘moved’ into dollars to pay for U.S. products shipped overseas whether iPhones or Boeing aircraft. The U.S. also has a broad array of financial assets from stocks to government bonds that members of other countries typically want to invest in, again creating demand for dollars in the process.

By Simon Moore, Forbes