When investing in the Forex market, there are a lot of different factors that can affect the condition of the market overall. While many different factors combine to affect the prices of current affairs in the market, political factors are some of the most profound influencing factors in the market. What exactly does the government have to do with the Forex market?
One political factor that can impact the condition of the Forex market is fiscal policy. Fiscal policy deals with how much the government plans on spending over a period of time. When the government spends more money, it tends to boost the economy in the short term. When the government increases spending, some private businesses end up with this money.
The money is then disseminated into the rest of the economy by paying wages and purchasing other products. With this influx of cash into the market, it tends to boost the economy and help raise the value of the country's currency. When the value of the currency is raised, it may affect currency pairs in which that currency is included. For instance, when the value of the dollar increases, it may drive the price of the USD/JPY or USD/CAD pair up.
Deflating the Currency
Besides fiscal policy, the government can also influence monetary policies with the help of its central bank. Sometimes, a country's central bank will do its best to deflate the value of a currency. By doing this, it lowers the currency value compared to other currencies in the market, which can have a drastic effect on the Forex market.
This can sometimes help the country's economy when it comes to boosting exports to other countries. By lowering the value of the country's currency, it makes products cheaper for other countries to buy. This tends to increase product exports to other countries, which ultimately boosts the economy overall.
In some situations, the government may decide to print more money and increase the money supply. For example, this is commonly debated by political pundits who do not agree with the policies of the Federal Reserve. The Federal Reserve has recently used a strategy known as quantitative easing, which is basically another way of saying that they are printing trillions of extra dollars to put into the money supply. The problem with this scenario is that it lowers the value of the dollar relative to other currencies.
It increases inflation for the people in the United States and makes many products cost more money. This is a big part of the reason that gas prices and food prices continue to skyrocket for consumers in the United States. Since the value of the dollar has been declining, it takes more dollars to buy oil and other products from overseas. As the Federal Reserve continues on with its policy of inflation, it will affect the Forex market by lowering the value of the dollar relative to other currencies.
Dealing with Deficits
Another way that the government can affect the Forex market is in how it handles its deficits. When politicians debate about how to handle the deficit, it can impact the Forex market tremendously. For example, last year when Congress was in the process of debating how to handle the debt ceiling increases, it affected the markets quite a bit. Some in Congress wanted to increase the debt ceiling so that the government could continue to borrow money to pay its bills.
Other members of Congress wanted to leave the debt ceiling where it was so that the government could get off of its money borrowing kick. When the decision ultimately came down to the wire, the markets responded with a lot of uncertainty.
The government influences so many different areas of the economy and the country that almost anything that it does can impact the Forex market. For example, when the country decides to invade another country or go to war with another country, this can have an impact on the market. If the government decides to subsidize one particular industry, it could affect the market as well.
As an investor in the Forex market, you have to pay special attention to everything that the government does on a regular basis. Otherwise, you may be left out in the dark when something big happens and it could negatively affect your investment portfolio. Pay attention when the central bank leadership speaks and when any other major announcements are made by the government.
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- Thursday 31 May 2012