Chapter 7: Factors influencing FX markets

Over the longer term, it is undeniable that underlying economic fundamentals will drive the currency markets in one direction or the other. In the shorter term, however, elements of fear, greed and herd behaviour drive the foreign exchange markets. This herd mentality can be reflected in short-term movements that are often a reaction to market rumours, or might evolve as a longer term phenomenon because traders are paying undue attention to one area of market influence while virtually ignoring another. We saw this in the late 1990s, when the United States and the USD became the ‘flavour of the month’ among global investors, despite the everpresent trade deficit.

Many factors in each country can and ...

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