Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 35

Exchange Rate - Since 1973 exchange rates have had a floating characteristic as opposed to being fixed by the governments. This makes them subject to constant volatility caused by various factors. One important factor contributing to this volatility is the interest rates level, which is adjusted by the Fed in response to inflation among other factors. So it can be argued that economic conditions drive the exchange rate rather than the other way around. Nevertheless, changes in exchange rates affect a number of areas such as imports and exports, tourism, and finance. These effects can in turn contribute to price changes in goods and services and therefore the overall economic trend, including the possibility of an inflationary condition. (Note: Historically hints of changing interest rates have shown to have an immediate effect on exchange rates. For example, it is believed that when interest rates in a given country indicate a rise, that country's currency rises in value as more investors stock up on the currency to profit from the higher rates, thereby strengthening the currency. However this theory does not always hold true. The flip side of this scenario is that, faced with higher interest rates, the domestic businesses may not be able to borrow enough money to expand their businesses. Combined with lower consumer spending, the higher interest rates may contribute to undermining the local economy. And a weakened economy stands a chance of having its currency devalued.)

Again, the aforementioned indicators are just a sample (but a good sample) of many economic indicators that can be utilized to assess the strength and the trend of the economy.Many economists and economic analysts spend their careers forecasting these indicators before they are reported, causing the markets to adjust themselves based on their predictions. That is the reason why often the release of these reports is not met with much reaction. But there are times when an indicator comes in above or below expectations and can jolt the markets if it differs significantly from the forecasts.


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