In our previous posts we have touched on the working of currency ETFs and how investors can reap benefits from the exchange rate of the dollar versus other major global currencies. We also looked at the key advantages of investing in currency funds and its role in mitigating the risk elements in your portfolio.
Currency exchange-traded funds (ETFs) can help you understand the forex market complexities and use it to diversify risk. Let’s take a look at the latest developments in this sector in the US and major global markets. While money continued to flow into emerging market bond funds in the first quarter, according to figures from reliable data providers, investors showed a strong preference for local currency debt, rather than hard currency, which is more sensitive to moves in US interest rates.
It is important to know what exactly determines the strength of a currency so that you can make better investment moves in this sector. This post from www.forbes.com offers valuable information:
Currency trading is complicated by the fact that there are so many factors involved. Not only are there a number of country-specific variables that go into determining a currency’s strength, but there are also other benchmarks–other currencies, for example, as well as commodities–against which a currency’s strength can be measured.
All the different currencies perform different every day because of fundamental data, overall economic performance or interest rates. Numerous factors determine exchange rates, and all are related to the trading relationship between two countries. Exchange rates are relative, and are expressed as a comparison of the currencies of two countries.
According to industry experts there are three crucial factors that determine the strength of a currency and its long term stability:
- Interest rates: Higher the rates better are the chances of overseas investors making higher returns on their investments.
- Economic policies: Observing fiscal discipline and developing policies that help control inflation can strengthen the value of currency.
- Stability: A strong and stable government can help the currency of the state gain strength if they create constructive economic policies and healthy development plans.
Why there is a need to strike a good balance.
Speaking of stability, that is probably what governments seek for their currencies, more so than strength. A strong currency makes a country’s exports more expensive, hurting that nation’s trade competitiveness. On the other hand, a weak currency makes imports more expensive, boosting domestic inflation. So the ideal course is to aim down the middle and avoid destabilizing fluctuations.
Investors should still have some understanding of how currency values and exchange rates play an important role in the rate of return on their investments to create a healthy currency fund portfolio.
Read more at: www.forbes.com
Photo Courtesy: business.westernunion.com