You hear it every day in the news. You see it in the malls. You witness it in airports. But have you ever investigated on how does foreign exchange (forex) trading impact you?
Well, you probably don’t think about foreign exchange until you travel and have to exchange your cash for international currencies. But whether you sense it or not, you are being influenced by the forex trading’s significant drag on the economy every single day.
Currencies need to be exchanged in order to conduct foreign trade and business, like merchandise trade, or the nation’s exports and imports. With this, the foreign exchange market has the power to affect everything you buy, from your favorite imported shampoo to your investments.
- It affects your everyday spending
Foreign exchange is one of the primary reason why grocery prices go up or down. If you’re living in Australia and you want to buy olive oil imported from Italy, either you or the company that you buy the olive oil from has to pay the Italian in euros (EUR). With this, the Australian importer would have to exchange the equivalent value of Australian dollars into euros.
A strong currency makes imports cheaper. That eliminates inflation and lowers the cost of living in your country, allowing your to buy more groceries. A weak currency, on the other hand, makes prices higher. It causes inflation, which means you have to pay more dollars for imported goods and other local goods that use international products.
- It influences fuel prices
When U.S. Dollar, for instance, rises in value against other currencies, fuel prices tend to fall. It’s because the gas price primarily depends on oil prices. All oil contracts are sold in U.S. Dollars. Since Saudi Arabia (who provides most of the world’s oil) has pegged its currency to the dollar, the riyal also rises when the dollar rises against other currencies.
When the dollar weakens, this is when gas prices rise. Saudi Arabia and other Organization of the Petroleum Exporting Countries (OPEC) nations must charge for more oil and for higher import costs to receive the same revenue.
- It limits your travel budget
The premise is simple: the current exchange rate tells you how much you can buy in the country you’re visiting. For instance, when you’re an Australian traveler and you know that AUD is currently strong, you’ll be able to buy more when you visit nations with weaker currencies. But if the AUD is weak, everything in your trip will appear more expensive.
- It has the control over your job and business
Take the United States for example. A strong dollar is not always good to U.S., especially for American businesses and workers. They tend to export less since a strong dollar makes their products more expensive, slowing down economic growth. This also causes U.S. companies to outsource jobs overseas since foreign workers, who are paid in relatively weaker currencies, cost less. They often result in fewer jobs for American workers and more income for overseas workers who are pleased to exchange strong hard-earned dollars.
Strong currency harms even companies that don’t export since they are now competing with less expensive imports. Americans are likely to buy those cheaper products that are imported than those “made in the U.S.” With this, U.S. manufacturers gain less profits and are forced to lower prices to remain competitive.
- It can make or break your international investments
International investing differs from investing in your home market in such a way that you are greatly affected by the rise and fall of the currency.
A fluctuating currency can make or break your stocks. Every time you buy shares of a foreign stock, remember that you’re making two crucial investment decisions: you’re gambling on both the performance of the currency and the performance of the company itself. The ideal scenario is, of course, being right about both. The stock price goes up, and you get an extra advantage from a strengthening currency. The worst thing that could happen is when the stock price goes down, and the currency loses value relative to the dollar. As the value of the foreign currencies changes so is your return of investment.
Author Bio: Sophie Harris is one of the writers for FP Markets CFD Trading, a CFD and Forex Trading provider in Australia with over 12 years industry experience serving global clients. Writing informative content about business and finance is her cup of tea.