Foreign Currency Market

The currencies of different countries of the world have a particular characteristic: Not all have the same force, or the same support. That’s why when we talk about foreign currencies exchange, there are currencies that have minor value in front of others and at the monetary market they are called weak currency.
When you want to exchange foreign currencies we should consider which and what is the exchange rate. An exchange rate is the difference of value between two currencies , that means that it is the currency needed to buy the other.
Foreign currencies exchange can be done with currencies in which the value dollar does not intervene, for example yen/Swiss franc at 156.60, this exchange rate that is called crossed means that a yen can be changed per 156.60 Swiss franc.
When we talk about foreign currencies exchange, we should also consider that there are two different kinds of exchange rates. One is the flexible system and the other is the fixed one.
In the flexible exchange rate system the Central Bank, adjust the exchange rate to modify the supply and demand to generate a major or minor income of foreign currencies.
A fixed exchange rate system will be very favorable for whom want to exchange foreign currencies as currencies do not fluctuate, they are fixed one according to the other. This kind of exchange rate makes the monetary authority Central Bank have an important reserve of national currency as foreign currency. In Argentine, for example, during the 90′s they set up an exchange rate fix, fixing the peso to the dollar, and so, this allowed foreign currencies exchange to be favorable to get consumer goods and travel abroad.

foreign currencies demand depends on the market situation and the investors’like. The increase or the fall of foreign currencies demand is ususally one of the thermometers that show the actual trend of the market. What happens with the yen, for example a weak currency but that often is one of the foreign currencies that has the biggest demand? What is the reason of this trend? Japanese currency has become the center while deciding whether to invest or not for risk investors. Japanese foreign currencies demand shows that the advantage that the yen has in front of other currencies, is the low interest rate. When investors are determined to assume more risks, they get into debt on a cheap way in yenes, taking advantage of the law interest rates and then they invest on countries where returns per investment are higher. That’s the way foreign currencies demand answers to the risk that investor is determined to take.
This operation that we have descrived previously debilitate the Japanese currency as moneylenders sell yenes and buy other foreign currencies. Situation changes according to foreign currencies demand when investors avoid risk. These operations are know as carry trader, basically what they do is buying a foreign currency to sell at the same time other. In this way, investor bet to have one foreign currency appreciated according to the other.
A very common carry trader, that takes a fundamental part in foreign currencies demand, is to borrow money in Japan, which reference interest rate is 0.5%, and invest in Australia, that has an interest rate of 6.75%.

Dollar seems to be the measure of all the exchangable goods, during the years it has gained ground, even if this expansion has been reduced since the appearance of the euro in 1999.
In Great Britain there is a currency, the pound, that still has value in front of crisis and important changes that have suffered the world economy in the last fifty years.
The name of the foreign currency pound, appeared in the 8th century. The term pound and sterling pound appeared in the Anglo-Saxon Great Britain, when a reform transformed the principal currency, called sterling in a new foreign currency, sterling pound, that was equal to 240 sterlings.
The foreign currency pound was born related to the Silver Standard and was replaced by the gold in 1717. The symbol that represents the foreign currency pound is £ and actually even if there are some currencies that have a better position, the foreign currency pound is still one of the principal foreign currencies used in the world.
As the euro, the foreign currency pound keeps an influence zone called sterling area and it is about those countries that were part of the British empire or are members of the Commonwealth.

The dollar in 2007 has fallen, even if the situation seemed to be something temporary, after some days the economic operators and analysts realised that the crisis would continue some more time.
2007 was a very bad year for the American economy, projections done for the beginning year were around 1.5% growing rate. This will make the Federal Reserve of the United States to take the interest rate from the actual 4.50% to 3.50% for the second term of 2008. And in case recession risk continues we will se the Fed reducing the rates to 2%.
We also have to consider that during 2007 the dollar suffered an unexpected shock, as the mortgage crisis knocked the financial system and brought different kinds of problems.
The problem is that the American economy spends in advance and this concerns to all its citizens. Noone has the money in cash to buy properties, Americans have credits for terms that some times are extended, and they live with a rhytm of expenditure that is not possible to control.
The problem appeared during 2007 when interest rates increased because of the crisis, thousands of Americans could not confront debts and this make a collapse at the financial system.
If something was missed by the dollar in 2007 to stop suffering, there was a big shock because of the high risk mortgage crisis where thousands of investors saw the end of one of the bases of the American economic system.

What includes the crisis of the American dollar? During these last months the principal newspapers of the world have not done any other thing that talk about the devaluation of the American dollar and the possible crisis that we will have if this situation continues.
The fall of the American dollar against tje euro has been very important since October 2000 until the end of 2007: the european currency has been appreciated 65%, from 0,82 to 148 dollars.
Actually the American economy is supported by two fundamental bases. One is the commercial deficit of 25% that it has with China, principally as a consecuence of the excess of imports that China exports to the United States. The income received by the Asian countries because of the sale of products make their reserves grow very fastly. The problem is that the American dollar is falling and the Asian countries notice that their profits lose value.
With the devaluation of the American dollar, it is put in risk the devaluation of the Asian investment, this means that for attracting dollars to cover the deficit, the American federal reserve raise the interest rates, making the demand in United States fall and also the Asian imports.
What is actually true is that while we discuss the situation of the American dollar, there are others that want the euro to become the currency of world reserve. The principal issue is that throught the stimulation of the commercial deficit, United States generates an economic cycle where consumption is its principal motor, as Asian imports come into the United States and because of them they receive dollars and at the same time these countries buy bonds of the American Exchequer, making dollars come back to their original place. Moreover the big advantage that the United States have is that it is the one that has the power to issue dollars.