The FX Bootcamp Guide to Strategic and Tactical Forex Trading

NOT INTERESTED

But why do some central banks offer low interest? It is because they do not want demand for their currency. Remember, the higher the demand for a currency, the higher its valuation. This is not always wanted.

FIGURE 3.2 NZD and JPY Weekly

Source: DealBook® 360 screen capture printed by permission. c 2008 by Global Forex Trading, Ada MI USA

If a currency has a high valuation, it will cost more for foreigners to purchase the currency. Let’s say you are a business and sell a lot of products to foreigners via your web site. If your local currency valuation is high, then by association, your products cost more for your customers to purchase, because they must convert to your currency, which is expensive for them to do.

Case in Point: China

You may have read a lot about China. The United States is pointing its finger at China and accusing it of manipulating its currency to make it artificially low. Why would China want to do this? It is an exporting nation. Its economy is based on selling products to foreigners.

If its currency is cheap, then it is affordable for foreigners to purchase Chinese goods and services. If China allows the value of its currency to rise, it will cost foreigners more money to purchase Chinese money, thereby making Chinese products and services more expensive for its customers. The products may be the same price in the local currency, ...