Unlike investing in the stock markets where valuations and prices are linked and relative to the underlying currency. Foreign exchange rates are priced relative to another. But how linked to the state of the economy are currencies?
The USD is generally regarded as one of the strongest currencies because the US economy is viewed as one the relatively strongest.
Here’s what OFX Senior Currency Strategist, Hamish Muress had to say about how linked to the state of the economy currencies are.
Economies and currencies are intrinsically linked and often the fall of one economy from grace can drag down its currency. What we are seeing in particular at the moment as well is the frailties of economies being exposed by currencies as they shine a light on deficiencies.
There’s no need to look any further than the UK in this example. The pound has suffered extensively over the last week or so as the fallout from the coronavirus widens. However this isn’t necessarily because of investors being dissatisfied by the public health response or indeed the £330bn bailout. The Bank of England cannot be accused of being half hearted in its response either.
The cause for investor worry and pound woe stems from the UK’s large current account deficit. It’s well reported that the UK imports much more than it exports, but this shortcoming is usually disguised in times of certainty and stable trading environments as capital investment continue to flow extensively into the country.
With the coronavirus turning all of this on its head the shortcomings of the UK economy have been exposed and this can be seen in the reaction in sterling.
For more information on transferring money abroad you can see our currency broker comparison tables or to speculate on the foreign exchange markets through trading you can do so through a forex broker.
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Richard founded the Good Money Guide (previously Good Broker Guide) in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.