What Makes Currency Rise or Fall?


I remembered before that I chatted with a foreign exchange (forex) trader when I was thinking to try foreign exchange trading online as one of investing. And I asked him: “What Makes Currency Rise or Fall?”

In our discussion through Yahoo Messenger, he stated that currency trading is more stable than the stock market. He said that ‘currency trading is a balancing act between a particular currency against a basket of other currencies.’

 

If one currency fall, then definitely other currencies will rise. Comparing it to stock market, if there is a rampant fear among investors, then definitely all stocks will get affected. So what really makes a particular currency rise or fall?

He continued to answer the question by telling me that they use programs and charts such as Moving Average Convergence and Divergence (MACD) and Bollinger. When I searched it in the internet, these are technical analysis charts and graphs that use historical value in order to predict future value. But even the historical value has some basis right?

He ultimately said that the strength of a currency depends on its demand. It’s the universal law of supply and demand. When a demand for a currency is high, then that particular currency will rise. Conversely, when the supply of a currency is higher than its demand, then it will fall against other currencies.

The next logical question will be: “Now, what does a country makes in order to make its currency more demanding or attractive to others?” The answer to this question relies on the treasury of one country particularly interest rates. It’s comparable to a bank. Definitely, a bank depositor will seek banks that gives the highest interest rates.

Then why can’t all treasury of each country just increase their interest rates in order to have their currencies appear demanding or attractive? It’s not that easy. In fact, it requires a skillful balancing act by the treasury to ensure the flow of money (i.e. inflow and outflow) If there’s a “too low” interest rates, then the currency will fall. But if there’s a “too high” interest rates, then the economy will suffer as it will require investors such as entrepreneurs to borrow money at a much higher interest rates to use as their capital for business growth and expansion.

When I was a kid, I was puzzled that why can’t a country just print more and more currency and give it to its citizens so that they can all be rich? I learned that it’s not that easy. Again, it’s the law of supply and demand. Too much money in the system will make inflation rates to rise and it will push commodity prices to go up.

This was the case for the country Zimbabwe having one of the worst valued currency in the world. In Zimbabwe, everybody is considered as a billionaire! You might be shocked but it’s definitely true! How come? Well, they have one of the highest, if not the highest, inflation rates in the world. Their economy is suffering from hyperinflation. When you trade their currency to, say for example US Dollar, the currency trading is: 1 US$ ~ 1 Billion Zimbabwe Dollars.

Wow. It’s as if their currency has no value at all. In fact some of the news that I saw, some of the locals there used their local currency as tissue papers to wipe their ass in toilets. In fact, you will need to use ‘billions’ of dollars just to buy “cheap commodities”. Let’s view some of them:

One Hundred Billion Dollars is the cost of just three eggs

A “typical receipt” in their restaurants

And a lot of “billionaires” even as young as a kid

Sometimes, they don’t count anymore but they just use the weighing scale

What happened to Zimbawe’s economy? What made their currency fall too low as if there’s no more value into it? Their inflation rate increased by as much as 200 Million percent! Many locals turned to their leader Mugabe as the culprit. He literally destroyed the banking system when he forcefully got the lands from their farmers without any remuneration. The effect? Their economy collapsed!!!

While some issues were already resolved, there’s a question that still kept me thinking: Why do the currency of some prosperous countries such as China (currency Yuan) and Japan (currency Yen) were considered “low” compared to the US Dollar? Shouldn’t be their currencies appear attractive and more demanding than the others since their economies were doing well?

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Tyrone is a passionate financial literacy advocate. He started this blog on November 2008 when he watched The Secret which talked about Law of Attraction because he wanted to become a millionaire and wanted to know how a millionaire acts. At the age of 26, he achieved his first million. To find out more about him, click here or follow him at Instagram

24 responses on “What Makes Currency Rise or Fall?

  1. Hi Ryan, thanks for the commendation. No, I don’t trade forex but I want to try and learn it. They say it’s a good alternative investment on the stock market especially nowadays that stocks are suffering a very bear market.

  2. Hi admin! It’s me again! I’ve read your posts about stock trading and I think I’m not yet ready for that kind of investment, esp now that stocks are going down again because of the swine flu issue. I’ll try to read more about forex trading, hopefully this won’t require a huge capital. Last February, I bought AUD$ 1,000 (AUD$1 = P31) from a friend. Now the rate is at 34 something. I hope it’d be back at P38 a dollar lol!

  3. Hi Lily, thanks for the visit again. As for me, I think I won’t hold on long term on forex unlike stocks. I had a friend who trades forex online. He’s making some nice profits in a week’s time, but eventually lost all of it including a decrease in his original principal on the second week.

  4. Thanks for the information. There seems to be a never ending supply of great information on the net. I love learning new stuff, and will be back to read your posts regularly !! Thanks again 🙂

  5. Lily,

    If you don’t know how to trade in the forex market then don’t start trading until you have learned at least the basics. You can make a lot of money in forex trading, but you can also lose a fortune.

  6. I’ve read about hyperinflation before and learned a lot!

    I didn’t know that our country even suffered hyperinflation during World War II – remember the lessons from history – Mickey Mouse money? Our elders had mentioned that the money used to have no value at that time, and they were really carrying bayongs of money to buy necessities (just like the kid above).

    Some first world countries too, had suffered hyperinflation: Japan, Poland, Russia, Germany and even US are examples. However, these countries were able to recover and we look up to these countries now.

    • Yes. Which also means that more gold, more stable economy and higher currency value. Until now, I am not sure if this thing is true or just a hype.

  7. In July 1944 an agreement was reached at the United Nations Monetary and Financial Conference which pegged the value of gold at US$35 per ounce and the whole world looked on US$ as the gold standard in purchases. But in 1971, US President Nixon took the US$ off the gold standard after his administration realized that the US no longer had enough gold to buy back every dollar that foreign governments were handing in.

    In 1973, US President Nixon asked King Faisal of Saudi Arabia to accept only the US$ in payment for oil, and to buy US Treasury bonds, notes and bills with their excess profits, so that USA can continue spending money and not pay it back. In return, the USA pledged to protect Saudi Arabian oil fields from seizure by USSR and other nations including Iraq and Iran.

    The 1973 Arab-Israeli War upset this agreement and caused the Great Oil Embargo of 1974. By 1975 the Great Oil Embargo was over and all members of Organisation of Petroleum Exporting Countries (OPEC) accepted to sell their oil only in US$. Every nation was saving their surpluses in US$ since every country needed US$ to buy oil. The OPEC oil sales supported the US$.

    Since only the US Federal Reserve can print the US$, the US control the flow of oil. The US essentially owns the world’s oil for free because oil is denominated in US$ and the US$ is the only fiat currency for trading in oil.

    So long as almost three quarter of world trade is done in US$, the US$ is the currency which central banks accumulate as reserves. But central banks, whether China or Japan or Brazil or Russia, do not simply stack US$ in their vaults. Currencies have one advantage over gold. A central bank can use it to buy the state bonds of the issuer, the USA. Most countries around the world are forced to control trade deficits or face currency collapse, but not the USA. This is because of the US$’s reserve currency role and the underpinning of the reserve role is the petrodollar. Every nation needs to get US$ to import oil, some more than others. This means their trade targets US$ countries.

    Because oil is an essential commodity for every nation, the Petrodollar system, which exists to the present, demands the buildup of huge trade surpluses in order to accumulate US$ surpluses. This is the case for every country but one — the USA which controls the US$ and prints it at will or fiat. Because today the majority of all international trade is done in US$, countries must go abroad to get the means of payment they cannot themselves issue. The entire global trade structure today works around this dynamic, from Russia to China, from Brazil to South Korea and Japan. Every country aims to maximize US$ surpluses from their export trade. Currently over $1.3 trillion of newly printed US$ is flooding into international commodity markets each year.

    The Petrodollar system nearly broke down during the US President Carter’s tenure, mainly due to double digit inflation. But US President Reagan removed all controls on oil and fuel prices and all restrictions on oil drilling to restore the stability of the US$. Oil flooded the market, prices fell, and petrodollars became more valuable. These were some of the most prosperous years that the US had. But the danger remained, because the US continued to spend more US$ than it earned. The high US$ allowed the US to buy imported goods at a massive discount, a kind of subsidy for US consumers at the expense of the rest of the world. The high consumption of imports, however, hit US manufacturing very hard. The overvalued US$ was a major component of the bubble economy of the late 90’s.

    The reality is that the value of the US$ is determined by the fact that oil is sold in US$. If the denomination changes to another currency, such as the euro, many countries would sell US$and cause the banks to shift their reserves, as they would no longer need US$ to buy oil. This would thus weaken the US$ relative to the euro. The USA propagates war to protect its oil supplies, but even more importantly, to safeguard the strength of the US$. The fundamental underlying motive of the US in the Iraq war, even more than the control of the oil itself, is an attempt to preserve the US$ as the leading oil trading currency. The fear of the consequences of a weaker US$, particularly higher oil prices is seen as underlying and explaining many aspects of the US foreign policy, including the Iraq and Libyan War.

    Until November 2000, no OPEC country dared violate the US$ price rule. So long as the US$ was the strongest currency, there was little reason to as well. But November 2000 was when France and other EU members finally convinced Iraq’s Saddam Hussein to defy the USA by selling Iraq’s oil-for-food not in US$, but only in euros. Few months before the US moved into Iraq to take down Saddam Hussein, Iraq had made the move to accept Euros instead of US$ for oil, and this became a threat to the global dominance of the US$ as the reserve currency, and its dominion as the petrodollar. The euros were on deposit in a special UN account of a French bank, BNP Paribas.

    If this Iraq move to defy the US$ in favor of the euro were to spread, especially at a point the US$ was already weakening, it could create a panic selloff of US$ by foreign central banks and OPEC oil producers. In the months before the latest Iraq war, hints in this direction were heard from Russia, Iran, Indonesia and even Venezuela. In April 2002 at the invitation of the EU, in Oviedo Spain, Iranian OPEC representative Javad Yarjani delivered a detailed analysis of how OPEC at some future point might sell its oil to the EU for euros not US$.

    All indications are that the Iraq war was seized on as the easiest way to deliver a deadly pre-emptive warning to OPEC and others, not to flirt with abandoning the Petro-dollar system in favor of one based on the euro. The Iraq move was a declaration of war against the US$. As soon as it was clear that the UK and the US had taken down Saddam Hussein’s regime, a great sigh of relief was heard in the UK Banks.

    After considerable delay, Iran opened an oil bourse which does not accept US$. Many fear that the move will give added reason for the USA to overthrow the Iranian regime as a means to close the bourse and revert Iran’s oil transaction currency to US$. In 2006 Venezuela indicated support of Iran’s decision to offer global oil trade in euro.

    Muammar Qaddafi made a similarly bold move, by initiating a movement to refuse the US$ and the euro, and called on Arab and African nations to use a new currency instead, the gold dinar. Muammar Qaddafi suggested establishing a united African Union , with its 200 million people using this single currency. The initiative was viewed negatively by the USA and the European Union (EU), with French president Nicolas Sarkozy calling Libya a threat to the financial security of mankind. But Muammar Qaddafi continued his push for the creation of a united Africa.

    Muammar Gaddafi’s recent proposal to introduce a gold dinar for Africa revived the notion of an Islamic gold dinar floated in 2003 by Malaysian Prime Minister Mahathir Mohamad, as well as by some Islamist movements. The notion, which contravenes IMF rules and is designed to bypass them, had had trouble getting started. But today Iran, China, Russia, and India are stocking more and more gold rather than US$.

    If Muammar Qaddafi were to succeed in creating an African Union backed by Libya’s currency and gold reserves, France, still the predominant economic power in most of its former Central African colonies, would be the chief loser. The plans to spark the Benghazi rebellion were initiated by French intelligence services in November 2010.

    The cost of wars are not nearly as big as they are made out to be. The cost of not going to war would be horrendous for the US unless there were another way of protecting the US$’s world trade dominance. The US paid for the wars by printing more US$.

    In February 2011, Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF), has called for a new world currency that would challenge the dominance of the US$ and protect against future financial instability. In May 2011 a 32 year old maid, Nafissatou Diallo, working at the Sofitel New York Hotel, alleged that Strauss-Kahn had sexually assaulted her after she entered his suite, causing him to quit his job on May 18, 2011

    Accepting Chinese renminbi (RMB), also known popularly as the yuan for oil, Iran and Venzuelathey have constantly been threatened by the US. If euros, yens, yuans or rubles were generally accepted for oil, the US$ would quickly become irrelevant and worthless paper. This petro dollar arrangement is enforced by the U.S. military.

    Venezuela reportedly has the largest oil reserves in the world. Venezuelan President Hugo Chavez has been a strong proponent for tighter Latin America integration – which is a move away from the power of the US banking cartels.

    Venezuelan President Hugo Chavez formed oil export agreements with Cuba, directly bypassing the Petrodollar System. Cuba was among those countries that were later added to the “Axis of Evil” by the USA. On Aug 18 2011, Venezuelan President Hugo Chavez announced a plan to pull Gold reserves from US and European Banks. On Aug 24, 2011 a 7 magnitude earthquake occured in Northern Peru bordering Venezuela which doesn’t use the Petrodollar system and Brazil which has been engaged in discussions to end US$ denominated oil transactions.

    Venezuelan President Hugo Chavez has accused the US of using HAARP (High Frequency Active Auroral Research Program) based weapons to create earthquakes. HAARP is an ionospheric research program that is jointly funded by the US Air Force, the US Navy, the University of Alaska and the Defense Advanced Research Projects Agency. The HAARP program operates a major Arctic facility, known as the HAARP Research Station, located on an US Air Force owned site near Gakona, Alaska.

    HAARP has the ability to manipulate weather and produce earthquakes, since it is capable of directing almost 4 Mega Watts powerful radio waves in the 3 to 10 MHz region of the HF band up into the ionosphere. This energy can be bounced off of the ionosphere and permeate the earth and subsequently cause strong intense oscillations along fault lines of targeted areas to produce earthquakes. Using HAARP, depending on the frequency, focusing, wave shape, adversaries can induce at a distant aiming point, a variety anomalous weather phenomena such as hurricanes, flooding, or drought.

    Already several countries including Russia, China and Venezuela have suggested that a HAARP type technology weapon is capable of such and attack, been used against several countries causing severe destructions in Haiti, Japan, Russia, China, Iran, Chile, New Zealand, Afghanistan, Turkey etc. Any naturally-occurring earthquake has a ‘pulse-wave’ and several recent earthquakes did not have a pulse effect, indicating to seismologists that they could not have been caused naturally.

    If any country attempt to eliminate the Petrodollar system and dump surplus US$ into the international and US financial markets to cause the quick collapse of the US$ may be attacked with HAARP to destabilize its economy and currency and to prevent a move away from the US$ and the Petrodollar system.

    The credit crunch initiated in 2007 in the subprime mortgage market in the US had devastating spill-over effects for China’s exports. The scarcity of US$, due to the repatriation and deleveraging flows into the American financial system caused a sudden plunge in the external demand for goods manufactured by China and triggered the consequent lay-off of several millions of workers in China. This experience encouraged China to use its own currency in trade.

    The US may have averted a debt default by compromising on how to cut the US budget deficit, but underlying problems remain and those economic woes are driving a global search for an alternative reserve currency. The US now needs a net inflow of several billions US$ a day to cover its deficit.

    In 2011 Russia began selling its oil to China in rubles. The US debt crisis adds new urgency to the China’s efforts to promote its currency renminbi as an alternative reserve currency. China has already signed bilateral currency swap agreements with several countries ranging from Indonesia to Belarus and Argentina to promote the renminbi as a means of settlement in international trade. China’s growing trade and financial links with the rest of the world will make the renminbi more acceptable. If countries continue to lose their willingness to hold the US$ the impact to the US$ and the collapse of the US$ could be very dramatic.

  8. all peoples are one.. The god gave all things in the nature for all living things then y money, war etc.. Really the man who found the money is really stupid.. Earth is only our country… There is none other name..

  9. The thing about it is the USA is becoming the leader in oil production, and will be the largest producer in a few years, if you tried to use any other currency they would raise the price of oil to take care of that, as now if the dollar goes down the price of oil goes up

  10. This piece is an eye-opener and worth reading by all in the whole wide world.No one country can change the status quo of the global oil trade and the strange happenings and occurences in the world.It should collective effort of all countries

  11. only if Mr Mugabe understood business non of this would have happened…he only knew politics and I don’t blame him that much I blame his hardheaded mind..

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