In this article, we will look at how can forex trading affects the economy, and what are the factors that play into this whole equation.
16 December 2019, AtoZ Markets: If there’s one sure thing in today’s world, it’s the fact that economies aren’t stable. Most countries have their own financial and economic problems, and it often reflects on every business market you can think of. That naturally includes the forex market, which is where currencies are traded all around the world. It is one of the fastest-growing, and currently the biggest markets in the world, with trillions of dollars traded everyday!
4 Reasons Forex Trading Affect the Economy
#1 Facilitating trade
The most important function of the forex or currency exchange market is to facilitate international trade between countries. It is there to aid banks, large companies, governments, and anyone willing to do international trade conduct transactions that span different countries. When there are fluctuations within the forex market, it stands to reason that those countries are affected because their ability to conduct transactions and close deals might be impaired depending on what exactly is happening with the currency exchange.
The math is simple; powerful countries and have stronger economies and in turn currencies, which allows them to be more influential in the daily trades. However, according to traders’ behaviors and how they conduct trade, the market might be affected, and this, in turn, affects those stronger countries and causes price changes which might damage their interests. In simple terms, super powers – rich and influential countries – make profits in the forex market because they have currencies that help them when exchanging goods with smaller countries. They take advantage of their powerful currencies and it is easier for them to conduct international deals, which are very important to the overall status of the economy. If that changed for any other reason due to problems with the forex market, this might be problematic for the superpowers.
#2 Boosting the economy
Foreign currency exchange is done on two fronts: the retail market and the institutional sector. The latter is much bigger compared to the former, and it’s done by financial conglomerates, which is why the trading volume is this high. So, how does it impact the economy? A country’s economy relies on the demand for its currency –– basic demand and supply. The better the country’s currency is doing in the forex market, the better its economy will be. This is why Forex Trading Online changed the game; anybody could learn how to trade in currencies from the comfort of their homes, which creates a much higher demand for certain currencies. As long as people keep using a certain currency, like the USD mainly, then the United States’ economy will prosper and the country will be able to meet its financial obligations.
#3 Long term effects
Sometimes, the effect of the forex market on an economy isn’t something you can see right now; the outcome can be long term for certain cases. Let’s say a country has increased demand for its currency because its tourism sector is flourishing or it’s finally exporting some local goods everywhere. This will mean the currency becomes more valuable in the forex market, which in turn leads to the country making profits in dealing with smaller ones. In the long run, this leads to a better economy and significant growth. Yet, sometimes, short term changes are required after some period of stagnation when their country’s currency is not in high demand.
#4 Price movements and the economy
Like the stock market or any other major financial one, forex has its share of speculators –– people who invest in foreign currency and hope to make a winning. Now, any successful market has enough liquidity to cover all speculators and traders, but if it fails to do so, it might face some serious problems because speculators are crucial for any market to survive –you can’t just rely on people who do this for a living. Naturally, having this many of them can affect the rates and disrupt the market, but it doesn’t happen as often as the stock market – though the possibility is there. If this happens and prices fluctuate because of hopeful winners, this can cause major problems to countries exporting because they find that the rates dropped for instance, so they’re losing money. The importer on the other hand benefits in this case. So, countries can definitely suffer depending on those fluctuations, or they can benefit.
The world of foreign currency exchange is intricate and intertwined with the economy. If one is affected, positively or negatively, you can rest assured, the other will follow. It all comes down to how good traders are in taking advantage of those changes.
What are the other reasons for the Forex trading affect the economy? Let us know in the comment section below.