By Cedric Welsch
The Forex market is often referred to as being perfect. Some people might think of perfection as a place which sells wonderful goods at bargain prices. However, in economic terms perfection is seen in a different light. It is a state in which the laws of supply and demand remain unfettered.
Economists are great at theory. Theoretically the ideal situation is one in which buyers and sellers are evenly matched so that prices are always in equilibrium. They may swing slightly around a pivot point, moved by certain variables but will always return to equilibrium. This was most probably the thinking that persuaded economists to abandon gold as the ultimate store of value. Instead, currencies were allowed to float freely against each other.
The huge volume of the foreign exchange market helps to keep in equilibrium. It is estimated that the turnover exceeds three trillion dollars in a single day. With such huge volumes it is not likely that a single trader can easily swing prices his way.
However, one should take note that central banks are active in the markets and they have such vast amounts available to them that they can certainly influence markets. Central bankers can influence price movements by raising or lowering interest rates or buy buying and selling large amounts of particular currencies.
The strength or weakness of a currency will have significant influence on a country’s exports. The strength of the American dollar relative to the Chinese Yuan, for example, is a major cause of the trade imbalance between the two countries. Chinese exports are easier to buy than American exports.
One objection is that the Chinese communist authorities are not altogether convinced about free markets, and so intervene to keep their currency conveniently weak. However, it could be argued that the American central bank can also manipulate the market by raising or lowering interest rates. So it may be a case of the pot calling the kettle black.
The Forex market is so dispersed across the planet that it is almost perfectly liquid. A buyer can always find a seller within seconds, and the same goes for a seller. Moreover, trading need not be confined to major currencies such as the Euro and the American dollar. It is easy to trade other currency pairs online, such as the Australian and New Zealand dollars. Since trading carries on for twenty four hours every day right across the world currency pairs are continually in motion, oscillating around values which are, theoretically, determined by the laws of supply and demand.
About the Author
It can be annoying to study live forex news that seem to be a bit overhyped, thus bringing fear. Even though forex broker reviews may be available everywhere, it is wise to stick with your trusted.
