To know how to successfully trade foreign currency, it’s vital to understand what a weak currency is in relation to a strong currency and how one can affect the other.
Aside from trading forex, the same criteria can also be used to help predict the stock market, international economies and even the political forecast.
Following are some of the advantages and disadvantages to strong and weak currencies.
A Strong U.S. Dollar
The values of most of the major currencies around the world are relative to the U.S. dollar. If the USD is strong, that means that people who own those dollars are able to buy more goods from a foreign country. The same rule applies for international business agreements as well as for the simple traveler who is touring a foreign country. For the tourist with dollars, it means a good value when converting those dollars to that of the foreign currency.
For the businessman, it can mean getting excellent prices or more goods for the same amount of money. But of course that is for the person who is paying in USD. For people living in other countries who want to use their currency to buy goods from the U.S., the opposite is true. If the dollar is strong, then they will have to fork over a larger amount of foreign currency for the same amount of goods.
A Weak U.S. Dollar
When the USD is weak, anyone holding those dollars will need to use more of them to make a purchase in a foreign country. For businesses that are buying foreign goods, they will be expensive. So when those goods arrive in the U.S., the prices will be higher for the consumer.
However, when the USD is weak, exports can be increased and more competitive in the world market. In other words, whereas with a strong dollar other countries had to pay a lot for goods, they can buy more cheaply from the U.S. when the dollar is weak. So while it’s a hardship for travelers or businesses, it’s great for foreign companies, for tourism to the U.S. and for job security in the U.S.
Advantages of Strong Currencies
In general if a country’s currency is strong, it can expect reduced prices of imports. This can bring the cost of living down significantly, and can even lead to a higher amount of consumer savings. If manufacturers depend on imported raw goods and those prices are lower, the cost of the end products will be lower for the consumer as well.
A strong currency can also help reduce the pressure of inflation in that country. With cheaper imports coming in, it helps boost the economy.
Investing in Foreign Currencies
While it might be easier to get a clear picture of where the USD might be heading, that is not always the case with other foreign currencies. Currencies that have a higher level of fluctuation can be more difficult to track when investing in forex.
