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Currency Markets and the Balance of Trade

Author: dominic Source: Unknown Click: times
The reason currency markets fluctuate are many.
The value attributed to a currency market may well be simply due to demand and supply.
For instance, a person who is buying goods from another country (an importer) will have to exchange their domestic currency for the foreign currency. This means they will be selling their domestic currency and buying the foreign currency. If this is a substantial amount, as rivet tools manufacturer in the case of a large buyer of raw materials for manufacture, hair supplies this demand for the foreign currency would reasonably be expected to place upward pressure on that foreign currency, with equivalent downward pressure on the domestic currency.
The case is the reverse when the individual is exporting goods overseas and is paid in foreign currency. In this situation they need to sell the foreign currency and purchase domestic currency, and this may place pressure on the market if it is in significant amounts.
A country's Balance of Trade is the net result when all exports are totaled against all its imports.
When a country has more imports than exports, this is known as a Trade Deficit, and has a negative influence on that currency, due to importers having to sell their domestic currency in order to pay for goods in a foreign currency.
It also suggests that money is leaving the country as goods are received in return for the foreign currency that has been exchanged. If this continued, less money would be available in the domestic financial system and therefore the price of money, interest rates, would go up.
Demand for goods and service will slow with the rise of interest rates, but the fact remains that money has left the domestic system and so interest rates will remain high without intervention. This necessarily means that prices will rise and so inflation will become an issue. This affects the real value of money, and so with less real value, the currency will be under further downward pressure.
For this reason it is important for a domestic economy to control its imports as against its exports.
If a country exports more than it imports, this is known as a Trade Surplus, and places upward pressure on the domestic currency as exporters seek to convert foreign currency into their domestic currency. This is perceived as positive for a domestic currency, wholesale salon supplies as it reflects the fact that a country is able to produce goods and services and receive an inflow of money into their domestic system. This eases the availability of finance and so interest rates decline.
With the additional finance, the economy can grow with more beauty supplies employment and investment taking place.
However, as all financial markets are interrelated and cyclical, when a Trade surplus causes the currency to rise, this makes foreign goods cheaper to domestic consumers, as they can sell their domestic currency and receive more foreign currency, in order to buy foreign goods. This makes the foreign goods cheaper, and will have the effect of increasing imports.
In this way, economic cycles influence the currency market and also the domestic market.
Today we are part of an extensive world financial system, and so the effects of trade deficits and trade surpluses, are but one of the many variable that influence a particular currency.
This article was provided by money and debt expert Fred Ballentine from IVA.net. If you need help contact him today.
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