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How Investors And Speculators Affect The Foreign Exchange Rate

GuidesHow Investors And Speculators Affect The Foreign Exchange Rate

The foreign exchange works like the Stock Exchange. Whenever investors trade in any kind of foreign investment they are dealing in foreign currency. This includes bank deposits, equities, bonds, or property investments. For example, a Scandinavian investor may want to buy shares in an American company. She will pay for the shares in US dollars, which probably means converting Krona to US dollars. A Japanese property investor selling premises in London will have to convert the proceeds from GB pounds to Japanese Yen.

Speculators and investors similarly trade foreign currency directly to benefit from fluctuations in the foreign exchange rate. For example, if a US investor discovers the Japanese economy is becoming stronger, it follows that the value of the Yen will increase (i.e. go up relative to other currencies). The investor would be wise to buy Japanese Yen, taking what is called a long position.

On the other hand, if he sees the Japanese economy in decline, and therefore the value of the Yen liable to decrease over time, he would be wise to sell Japanese Yen – i.e. take the short position. Speculators on the foreign exchange market can actually profit from currencies becoming either stronger or weaker, by taking the long or the short position accordingly.

Traders who speculate on the foreign exchange are generally short term dealers, tracking market activity closely; buying foreign currency and then selling it again within a very short time – sometimes just a few minutes. There are numerous attractions to trading in this way, and such traders keep the market volatile and exciting.

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