The movement of any currency is governed by many factors like demand and supply, country’s economic health, trade balance etc. One such significant determinant is the commodity price.

Oil and gold sectors influence the currencies in a big way. Knowledge of these sectors and their performance help the forex traders in understanding the movement of the currencies. Some currencies like USD, Australian dollars and Canadian dollars exhibit high correlation with these commodities. Whereas Swiss francs and Japanese yen are not much sensitive.

The oil prices are very dynamic. This is an important indicator of country’s economic health. Oil is traded throughout the world in dollars. OPEC countries enjoy when the prices of oil increase. Whereas the importing countries bear the consequences. When the dollar rises the crude oil prices tend to rise. The oil dependent economies like US, India have to shell out more money, hence weakening of the currency.

Different currencies are affected in a different way by the oil prices. This depends upon the fact whether the country is oil exporter or an importer.

Canada is an Oil exporter. Any fall in the demand leads to fall in the dollar rate. As the demand rises, the economy revives and hence the exchange rate. When the oil prices go down the importers like Japan tend to gain. Canada and Saudi America are major exporters. Canada is a regular exporter of Oil to US because of geographical proximity and political stability. The currency pair rate USD/CAD is inversely proportional to the oil prices.

The Japanese economy is affected in a different way by the oil prices. The reason is that Japan is one of the major importers of oil. The upward trend in oil rates has a severe impact on the economy of the country. The currency pair CAD/JPY moves up as the oil prices go down and moves upward as the prices decrease. Japan is highly dependent upon imports for energy requirements. The country is able to regulate the currency rate by other means like monitoring the interest rates.

Thus, currencies can be traded wisely if their correlation with commodities is understood.

Euro is the relatively new currency first introduced by the European Union in 1999.The currency has been adopted by the 16 countries of Europe. They are collectively known as Euro zone.

The EUR/USD is the most widely traded pair in Forex. Both the currencies are powerful currencies. The dynamism and high trading volumes of the two currencies make them very liquid, creating greater opportunities of profit by trading them. Oil is bought and sold in Dollars. Thus heavy trading of dollars takes place through out the world. The euro and dollar are the only currencies, which largely traded.

The movement of the currency pair rests on the following factors:

• Economic performance

The individual economies of both the currencies cast an influence on them. If USA witnesses higher economic prosperity than European Union, the dollar becomes stronger, if vice versa, the Euro strengthens. Interest rates, balance of trade etc are the key indicators governing the rates of the currency. It the interest rates are higher in America, the dollar becomes more expensive against the Euro.

• Political Stability

He recent times have seen lot of political instability among the countries that are the members of European Union. Political conditions are the deciding factors of monetary and financial reforms in the country. There has not been complete peace among the various countries, leading to decreasing rate of euro.

Trading of EUR/USD pair, trade regularly hedge. Hedging is done to minimize the risk. There is a high risk involved due to the high volatility.

The currency pair leaves no room for arbitrage. It is because here are no pricing fluctuations. Any deviations in the market are quickly rectified.

There is less of a difference between bid ask prices. Bid ask spread is low. This lowers the risks of the traders. Therefore the euro dollar currency pair is traded more than the other currencies in the forex.

The American dollar plays a very important role in the global economy. It is one of the most widely used currencies in the world. USA is the world superpower in both in financial terms and development terms.

Most currencies form a successful trading pair with the US dollar. Examples of few widely traded pairs are EUR/USD, GBP/USD, and JPY/USD etc. All of them have the American dollar as the counter currency.

The following factors contribute to USD emerging as the most important currency in the world trade.

• Stability

Federal Reserve Bank determines the rate and interest by regulation and controlling the flow of dollar currency in the market. FED is the independent central bank.it is responsible for formulating the monetary policy. Monetary policies are in turn regulated by three factors .The open market operations, maintaining the reserves and controlling the rate of interest imposed on banks and financial institutions make the monetary policy. These tools are so devised so as to maintain the exchange rate of dollar. No other currency has shown such a high degree of stability.

• Dominance of USA on world trade.

America is the largest trading country in the world. The superpower supports the economy and business of several countries with whom trading is done, be it import or export. Thus making USD the most important currency or hard currency of the world. Hence dollar dominates the forex also.

• High GDP of USA

America witnesses high Gross Domestic Product (GDP). The nation’s financial performance is gauged by its GDP.The classical definition of GDP is the measure of all goods and services produced by the people over a specific period of time. USA has the highest GDP in the world at 32.9 in 2008-09. America is basically a service economy. Agriculture contributes only 1% to GDP.High GDP implies high purchasing power of the country and thus high exchange rate. GDP is an instrument used by the federal bank to regulate the exchange rate.

Like any other business activity the objective of Forex trading is also to generate profits. There are simple methods of trading. But before a trader embarks upon buying and selling it is very important that he is equipped with some basic information about the forex market. A trader should be well informed about the major currency pairs, which can bring profilts. Leading market players should be known. A forex trader should be aware f the market and the probable loopholes where he can go wrong and loose money.

We shall now discuss basic techniques of trading.

• Currencies are trade in pairs. When the base currency’s rate is low, we buy. The currency pair moves when the base currency rate increases. It is the time we must sell. Some common trading pairs IS GPB/USD, EUR/USD.

• In order to be successful in forex trading one must understand the political and economic environment .The currency rates are influenced by the political stability, the economic, fiscal policies of the state. Thorough information of the governmental set up must be acquired of the country whose currency we intend to buy or sell. Rate of currencies go down if there is no political stability. Some times the monetary policies are such that the rates of interest are very high. It causes inflation leading to lower rates. Hence the entire environment must be studied.

• American dollar is very dynamic and has high liquidity. Therefore it must always be used as a base currency because US dollars are universally used. The trading becomes simpler when USD is the base currency. With the rise and fall of US dollars the market trends would be easier to understand.

• There are several softwares like Automated Forex Trends Analysis Program, FXCM trading station etc. It is advisable to be updated with these softwares as they help in regular monitoring of the market. A key to successful trading is in   being abreast of the market trends. Market changes at a very fast pace. These software guide on technical analysis, provide historical data etc. Thus facilitating the trading process. These help the trader to make a well informed decision rather than just speculate.

Forex is the foreign exchange market. It is the largest financial market in the world and allows the trading of currencies of different countries.

Large businesses, corporates, institutions, governments, banks etc are the active participants in forex trading.

However of late, forex is also witnessing trading by retail traders i.e. Individuals.

Forex trading can only take place in pairs. It is for this reason that the understanding of currency correlation is of immense importance.

Correlation is basically interdependence.

Following points must be remembered:

•    Interdependence between two traded pair is currency correlation.
•    The value of correlation can vary form –1 to +1.
•    When the coefficient of correlation is positive the currency pair move in the same direction.
•    When it is –1, it implies that the pairs are moving in the opposite direction.
•    When the coefficient is 0, they are moving at random, not having any significant effect on each other.
•    In order to make profits out of forex trading, we must know the currency correlation.
•    A track of the correlation of the currency pair, in the recent past, should be kept.

We can understand it by studying the following example.

We trade British pounds for a Japanese Yen. The pair is represented as GBP/JPY. The 2 currencies in a pair have an impact on one another. However, other currency movements also influence the pair.

The trading of other currency pairs, BGP/USD and USD/JPY   influences the pair GBP/JPY.

Let us assign names to currency pairs GBP/JPY as A
And BGP/USD becomes B

If the correlation is positive and is 0.96 .It means that both pairs are moving upwards and at the same pace.
However if it is 0.24, although the coefficient is positive the pace is not the same. Thus we can buy the pair moving slowly.

Similarly, the fast moving can be sold.

The technical analysis needs to be correctly interpreted .The currency correlation guides the trading decisions.

Forex or foreign exchange market is the largest financial market of the world. The trading goes incessantly all the 24 hours. (Weekends are the only exception)

Large financial institutions, banks, corporate, state do the trading. Even retail trading is fast catching up.

In the foreign exchange market we buy one currency for another. Thus it ought to have a tremendous impact on the businesses.

The exchange rates affect the industry because the currency rates are really dynamic. They change at a very quick pace, hardly ever static.

When the transaction takes place in the foreign currency, even small a change in the rates can make big difference running into millions.
The amount spent on the same services or products can greatly vary.
Effects are felt globally.

The import export industry is heavily influenced by the exchange rate.
The countries whose economy depends upon exports, rates of currency show an upward trend. Similarly, the imports costs go up in case the currency of the exporting nation goes up.

Factors affecting exchange rate:

•    Principle of demand and supply
Increased demand causes the rates to go down. The currency rate decreases as the supply rises.

•    Monetary Policies
The governments set the interest rates. The cost of money is high implying the currency rate is low.

•    Trade Balance
When imports are higher than exports trade deficit occurs. Deficit leads to depreciation. Consequently exports increase and the impact is reversed.

•    Inflation

Rising inflation leads to currency rates going down.

•    Gross domestic Product (GDP)
It is a deciding factor in currency rates. Higher GDP means greater employment, hence a high currency value.

•    Political factors
They also determine the exchange rates. A stable government can guarantee jobs, higher productivity, and positve trade balance.
Unstable economy leads to weak economy, thus influencing the rates of foreign exchange in a negative way.

The market sentiments and general idea of the traders also tends to cast an influence on the exchange rate.

Trading in foreign exchange market is different from trading in other financial markets. The difference lies mainly in the valuation. Normally in the financial markets, the valuation is done on solitary basis. It is the common way of understanding the other financial market prices and stock prices by the investors. However in the case of forex trading, the valuation is done on relative basis. This is a complicated and tricky method of valuation as compared to the valuation of traditional commodities and stocks.

The usual way of quoting the stock in a stock market is in dollars. Now the problem that arises is valuing dollars in the terms of dollars. One currency has to be valued in terms of another. This is the reason why all the foreign exchange transactions are carried out in pairs of currencies. The valuation of one currency related to another is called relative valuation.

When you take a currency pair like USD/JPY, the currency that is listed first in the given pair is the ‘base currency’ and the other one is the ‘quote currency’. Normally an established currency pair is used to quote the exchange rate.

In major cases of currency trading, the US dollar remains the base currency like for instance USD/CHF, USD/JPY. This is because the dollar has a higher value than the other currencies. The dollar is valued as 1 and based on this the changes in the value of other currencies are estimated.

The exception to the above rule is AUD, GBP and EUR which are as high as the USD or even higher than that. So, they become the base currency for valuation.

You have to understand the relationship between the base currency and the quote currency for tracing the increase or decrease signals from the price charts. If you keep these concepts in mind then relative valuation becomes easy and simple.

FOREX or the foreign exchange market is instrumental in trading one currency with another.

For successful trading it is important to have a complete knowledge of the trading pair of currencies. Certain parameters must be analysed to select the currency pair that needs to be traded.

The parameters are as follows:

• The characteristic features of the currency pair.

• The daily circulation of the currencies, the volumes in which they move.

• The rate of currencies can be encouraging for some businesses while closing the doors for some others.

• The statistical aids must be analysed to understand the performance of the currencies.

• Forex trading can be successful if the profits are maximised. Profits can be ensured if the above-mentioned parameters are carefully studied. Experts should be hired to do the analysis. There is software available for the effective performance of the tasks. More effort is required specially if more than one currency pair is traded at a time.

However in case the resources are scarce, people should stick to a well known trading currency pair like EUR/USD. This is the most widely traded pair through out the world. Enough statistical information, environments, analytical information is available already.

While trading one needs to be completely focussed. It is a time consuming and extremely taxing process.

Trading should be kept simple. With a normal computer, trading just one pair can take a lot of time.

Any mistake while forex trading can prove to be costly. One needs to formulate a strategy. Forex depends upon stock market, and other global economic indicators.

Basic forex trading strategies can be as follows

• Locating good stock market analysts.

• Compare the fundamental and technical analysis.

• If any positive correlation is found, then one can make an entry into the trade.

• Technical and fundamental analysis is carried out to identify the reversals and exits.

Thus, formulating a strategy ensures profitable forex trading.

Foreign exchange trading refers to the trading activity where the investor acquires one Country’s currency using another Country’s currency. The fluctuations that take place in the valuation of these currencies result in profit making, for the investor. There are various factors that contribute to have an effect on the price variations of different currencies.

The following are some of the factors that affect the forex trading.

• Inflation: This has a major effect on the forex trading. Even in the scenario of inflation, the economies are either shrinking or growing. They are not stagnant. As the inflation rises, the money supply increases and thereby the spending power decreases. The reduced spending power results in the decreased demand for the foreign currencies.
• Government Budgets: It is very important to maintain the fiscal solvency that is the indicator of general financial health of the country. Presenting a good budget is no easy task for the politicians. The surplus or deficit that happens to be the outcome of the budget becomes the determining factor of the value of currencies in forex market. If the budget shows a surplus then there will be a considerable increase in the value of the foreign currency and a deficit will make the value of the currency a question.
• Trade surpluses and deficits: The trade surpluses and deficits also lay their impact on the forex trading. There trade surpluses are usually beneficial as compared to a trade deficit. They have a huge brunt on the Country’s general economic status and well being. The novices have to note the effects of the trade imbalances and their impacts on the individual currencies across the globe.

An investor has to consider all the above factors while developing an investment strategy. The investors can enjoy huge profits that multiply by volumes if they can combine their knowledge with effective investment tools like FAP turbo robot.

Extenuating the risk with technology and knowledge shall yield huge and impressive profits.

There are many investment options these days. But finding a safe and viable one is important. There are many varieties of stocks traded in the stock market. They can be technology stocks, industrial stocks ore research and development stocks. Another area of investment is the foreign currency.

Though the stock markets rise and crash, the foreign currency market has remained stable over the period. There has also been considerable depreciation and appreciation of foreign currencies which are mostly predictable. You should gain the knowledge of the predictable signals that you have to look for, in order to maximize the profits.

Once you decide to go for foreign currency investments and formulate a strategy for the same, you also happen to increase the value of your investments. This increase in value is irrespective of the rise or fall in the value of the currency. The investor has to take a note of the movements and be on the correct side. If the value of one currency inflates compared to others then you will have to buy the inflating currencies and sell the deflating ones. You can make a significant portion of income in forex trading.

It is very important to know about the valuation changes pertaining to each currency and identify what triggers the change. Knowing the right trigger points can gain you huge profits. The movements of foreign exchange pricing are short but if you can identify and capitalize on them, you can earn a good amount as profit. There are many people who trade in foreign exchange for shorter period and earn huge profits.

Entering forex trading may be initially daunting. But once you learn to identify the predictable signals of change, you can understand the market trend. You can capture the positive movements as and when they arise and maximize your profits.

The global recession has hit adversely the economies worldwide. Many of these including the superpowers of the world have not been able to sustain and reverse the economic downturn. While Indian economy has also felt the heat of global recession but still it has been the least affected one.
The reason behind the comparative economic stability of India is the balanced government socio economic policies. Since the liberalization in 1991, India has continuously shown a steady growth in all the sectors like agriculture, industry and service sector. The government have paved the way for economic liberalization and welcomed foreign investors including foreign institutional investors (FII).
The foreign exports of India are looking up. And the figures indicate that the stand of Indian economy in the world is strengthening. The foreign direct investment equity inflows in second quarter of year 2009 were more than US$10 billion. Also the net investments by FIIs during April to September of 2009-10 were US$ 10 billion in comparison to US$ 7.08 billion till November 2006.
The Indian economy is the 4th largest one in the world in terms of purchasing power parity whereas in terms of the rates of the market exchange, it is the 12th largest in the world.
In September 2009, one US$ was equivalent to approximately INR 48. Now in first week of March 2010, 1US$ is equivalent to INR45.45 (approx.).  That means Indian rupee is gaining hold in comparison to US Dollar in world market.
The policies of Indian government in the latest budget have emphasized on improvement in each aspect like infrastructure, employment, per capita income, science and technology, agriculture, foreign trade and so on. Especially the foreign trade policy aims to double the percentage share of global merchandise trade in next five years and to facilitate development of India as a global hub of manufacturing, trading and services.
The new improved policies of government are stepping stones for Indian economic development and emergence of India as global leader in forthcoming years.

For international business currency exchange happens to be one of the most important aspects and important aspects of the world economy like economic development, trade, tourism, finance, etc are dependant on this.

While determining the fair value of a currency not one but a whole set of different factors are taken into account. Like for example the political Conditions in the Country which takes into account the stability of the government, the amount of corruption, bribery and the degree of law and order. Relationship of countries with one another is also studied.

Economic Situation of a country is another factor which determines value of currency for that country. This factors looks at various different details like jobs, unemployment, work ethic, infrastructure, inflation and direction of the economy. Even the perceptions and attitudes of other countries toward a country are essential and this is usually created by the news, media, movies, newspapers, rumors, etc.

Demographics of a nation is one more factor that is studied. A young population is generally looked at as a better future prospect, people who are more open to change and development and a growing size of the workforce.

The openness, trustworthiness and likeability of visible leader like the political leaders, sports figures, business owners and celebrities is also taken into account while determining the country’s currency.

Natural resources like mining of minerals, forests, oil, fish and other resources are considered in addition to the level of technology to development these resources.

How much is a country exposed to weather factors and what is their response towards it such as drought, tsunamis, earthquake and floods are taken into consideration.

War and conflict and education are also important factors that are studied for determining the country’s currency.

In a nutshell, currency values are determined by varied factors and are not dependant on one.

Currency exchange is an important aspect of international business. Economic development, trade, tourism, finance and many other important aspects of the world economy are dependant on this.

The main global currency is the U.S. dollar (USD). This means that it is the currency held by governments and organizations around the world to fund international trade and financial transactions. Many global commodities, such as oil and gold are valued by the U.S. dollar.

Currencies can be distinguished as either floating currencies or fixed currencies based on their exchange rate regime. Currency of the European Union, the Euro is rapidly becoming a dominant global currency. A huge percentage of daily trading on the foreign exchange is made up by the Euro and the U.S. dollar. This is according to the Bank for International Settlements, based in Basel, Switzerland.

In the rest of Europe, the British pound (GBP) and the Swiss franc (CHF) are strong currencies that remain outside the Euro zone although the United Kingdom and Switzerland are members of the EU.

A powerful global currency The Japanese yen (JPY) dominates Asian markets and challenges the Euro and the U.S. dollar for world dominance.

For Australia, New Zealand and Canada their currencies are known as dollars and these dollar currencies are commodity-based, which means their value floats with the value of the country’s foreign trade. Nicknames of these currencies are the Aussie, the Kiwi and the Loonie.

Currencies are the emerging economies in South America, Africa and Eastern Europe is most exciting now. There are a number of factors which affect the value of a currency like the political conditions of a country, economic situation, perception from outside, demographics, war and conflicts, weather factors such as drought, famine, tsunami, earthquake, floods and so on and education, natural resources, isolation vs. openness

International currency market is the largest and biggest financial market in the world but the flip side to the story is that it is also the most fluid market. Needless to say the economic condition of the country determines whether the value of that particular currency will be high or low, in the international currency market. US dollar has ruled the charts for a very long period of time and still remains the undisputed king, as far as international currency trade is concerned. We have seen a lot of pressure in case of the New Zealand dollar. It has taken a lot of beating and the main reason why New Zealand dollar has taken a beating is the economic condition of the country.

The latest data reveals that unemployment in New Zealand is at an all time high and this was reason enough for the international community to press the panic button. The figure gives away the story; the unemployment rate stands at 7.3%, much above the expectations of the analysts. More over the government of the day still needs to prove itself, and to the world at large that it can do something for the country and that too at a very fast pace. Recession has still not shown any sign of recovery. Add to this the rising inflation rate and the bad debts from the housing sector and it will not be difficult to understand why New Zealand dollar has taken a beating and is still under the scanner. Again the figure will give away the story; New Zealand dollar in comparison to the US dollar is at 0.69416. The lending rate in New Zealand is 2.5%; this again puts pressure on the New Zealand dollar.

China is more interested in investing in Australia in comparison to New Zealand (of course due to its own economic interest); this also puts a lot of pressure on the New Zealand dollar. Chinese economy has grown steadily, rather the economy is growing steadily and hence their tilt towards Australia puts the currency of New Zealand under tremendous pressure. Though the New Zealand dollar has recovered, to an extent, in comparison to what it was in 2008, they still have to go a long way if they want their currency to stabilize further.

Currency trading market, though the biggest and largest financial market in the world, is extremely volatile and fluid in nature. US dollar, still remains the undisputed currency in the Foreign exchange market, though it would not be wrong to say that unless we see a substantial spurt in the economy of the US, things might change in the near future. Last two quarters have shown a remarkable improvement (positive growth have been reported from various sectors) as far as the US economy is concerned. It was therefore not surprising to note that Euro hit it’s seven month low in comparison to the US dollar. The euro closed at 1.3827 and this in more ways than one gives away the story of the volatility of Euro. It becomes pretty clear and understandable when we refer to the figures of the bidding price and asking price of the Euro in comparison to the US dollar it is as follows 1.3715 and 1.3719, respectively, as of now.

There are various factors attached to the downturn of euro and one of the primary factors is the positive growth of the US economy, in the last two quarters. Add to this the worsening economic situation of the countries like Portugal and Spain. This is adding a lot of pressure on the euro and hence the beneficiary is undoubtedly the US dollar. Even the political condition in some of the countries, using euro, is not very conducive and therefore many analysts are keeping a very close watch on their political situation and stability. Another major reason for the seven month low of euro against the US dollar is the fact that German economy is still not showing major signs of recovery, this again puts a lot of pressure on the euro. If we see the overall, political as well as the economic condition of the European countries, it seems that euro will take a lot of time to bounce back against the US dollar.

A lot will depend on the decisions taken by and policies implemented by the European Central Bank, most of the analysts are very eagerly waiting for the decisions and hence the implementation of the policies. A lot will depend on this (European Central Bank meeting) if the euro has to rally against the US dollar.

The rippling affect of recession and economic slowdown in America has left the Australian dollar on a slippery surface. As of now the AUD (Australian dollar) in comparison to the US dollar, in terms of bidding and asking prices is 0.8800 to 0.8808. There are various reasons attached to the downslide of the Australian dollar. One of the primary reasons is the wait and watch policy (investors are very closely monitoring the Australian economy) and this is having a negative affect on the value of the Australian dollar.  The Reserve Bank of Australia has indicated that a further interest rate cut in the mortgage sector is not a feasible option. At present the interest rate is at 3.75% and the analysts were expecting a further cut of 0.5%. This is the main and primary reason why the Australian dollar finds itself on a sticky surface.

Another very important reason why Australian dollar is under pressure is the fact that despite the improvement in the export sector of Japan (the latest data shows that exports has shown a positive, upward growth as far Japan is concerned) the country’s overall economic condition looks bleak, in case of Japan. Economic condition of Japan has a direct impact on the Australian economy. Australia exports a lot many stuff to Japan and in fact they are one of the main exporting destinations as far Australia is concerned (to be precise, the second, in terms of export ranking). The irony here is that though export has gone up in case of minerals like coal and iron ore (Australia is exporting a fair bit of these two minerals to Japan) but export of other items/ products have not picked up and in fact are showing no signs of recovery. This is another very important reason why the Australian dollar remains under pressure.

The international rating of Japan (credit rating) is still on the negative side as confirmed by S&P. This again has put a significant amount of pressure on the Australian dollar. In case you are planning to buy the Australian dollar against United Kingdom’s pound then it is advisable that you should freeze the deal at 2.2000.

The year 2008 was bad, to put it mildly, in terms of recession and economic downturn/ slowdown in the United States of America. It was no different in the year 2009, perhaps even worse, it seemed as if the economy of the US was in a free fall. It is therefore not at all surprising that US dollar lost lots of its sheen and hence its value. To rouse the economy of the country the Government went ahead with another cut in the interest rates of the Federal Reserve. It was or rather is a misconception that these stimulus packages offered by the Government to bail out the economy will further plunge the value of US dollar.

It is not surprising to predict that the year 2010 will see the US dollar making a very strong recovery as compared to its counterparts (other strong currencies). We have started seeing the US dollar making a recovery in the past fifteen to twenty days and the year ahead seems to bring a lot cheer to those who have kept their cool and held on to the US dollar. It is also not astonishing and surprising to note that the last two quarterly results have been on the positive side and this has given the fillip, which was required for the US dollar to bounce back.

The positive sentiment of the recovery of the US dollar can be seen in the international currency market if you take a closer look at the figures and charts (international currency rates and charts). US dollar against European Euro, US dollar against Japanese Yen, US dollar against Australian dollar and US dollar against UK’s pound, etc. are all showing a positive tilt in favor of the US dollar. All you have to do is take a closer look at the increasing strength of the US dollar against most of the other strong currencies of the world.

A fair bit can be interpreted through the following figures: US dollar in comparison to the Japanese yen, as on date is 90.840 (bidding price) / 90.850 (asking price) and that of the Australian dollar in comparison to the US dollar is 0.8862 (bidding price) / 0.8866 (asking price). These two examples clearly show that the dollar is steadily gaining ground and the year 2010 will see a strong US dollar once again.

Credit risk or counter party risk arises out of the potentiality that outstanding positions on currencies will not be honoured as per contract due to a deliberate or unintended activity by that counter party. This is where the role of the clearing houses comes into action and forex trading takes place in regulated exchanges where trades are settled by the clearing houses. The concern for credit is minimized in this way. Credit risk can be replacement risks and/or settlement risks which are described below.

Replacement risks:

This occurs when the books of counter party are found to be unbalanced and shows a difference similar to the outstanding amount to the insolvent party. New transactions are entered into to re-balance the counter party’s books.

Settlement risks:

This occurs due to difference in time zones of different countries. Currencies are credited at different times during the day. This starts with Australian and New Zealand dollars, then Japanese Yen and other Asian currencies, after that the European currencies and lastly the US dollar. A party could be declared insolvent just after the payment has been made to it but before its own execution of payments.

The credit risk could be minimized by the credit worthiness of the related parties. Credit lines should be implemented with the investment banks, commercial banks, trading companies and the banks’ customers between each other for trading purposes. Constant monitoring of the financial strength of the counter party is required to be undertaken. The currency portfolio market value and the forecasted portfolio exposure to be taken into account by the end users for assessing the credit risk involved. For assessing credit risk, techniques such as probability analysis over the time – to – maturity of the outstanding position could be in use. Netting is also used which amounts to a single transaction per end of day to settle the net positions with one another. In this case trade by trade settlements are avoided totally. In times of liquidity crunch faced by banks a common reserve pool formed by groups of large banks could provide a short term backing.

Currency valuation of a particular country depends on a number of determinants. The major ones influencing such valuation are the economics of the concerned country including inflation, interest rates and trade deficit and, the social and political factors.

The purchasing power of a currency decreases substantially as a result of continuous inflation. In effect the currency becomes marginalized in valuation. Also inflation entails the currency to be unstable. After the inflation gradually decreases its rate of progression, then only the currency slowly regains its value.

In the USA, the interest rates and the crude oil prices play a determinant role in the valuation of US dollars. The borrowing costs as well as the anticipated earnings on investments are well affected by the interest rates. Foreign investors buy US dollar against their respective currencies to invest in treasury bonds whenever the interest rates are increased. So in a way the increase in interest rates entice the foreign investors’ community. The purchase of Euro becomes prominent at reduced rate of interest as a result the demand for US dollars becomes less.

A rise in the crude oil prices mean the demand for dollars will be less. This happens because of its dependence on outsourcing of crude oil from foreign countries to meet the ever increasing demand for its industries. A rise in crude oil prices increase the industry expenditure and profit margins are substantially reduced. The countries that are not much dependent on crude oil are less sensitive to this depreciating phenomenon of currency.

Increasing budget deficits of governments lead to the decreasing valuation of a currency. When it is minimized the currency value reinstates itself and a favorable exchange rate becomes prominent. The same happens when a countries import balances exceed its export balances and trade deficit arises.

Social changes and reforms, political scenario etc. also affects the valuation of the concerned countries currencies. If a government’s decision is viewed negatively by the rest of the world the currency might suffer a serious setback. The opposite also holds true. Positive policy changes and decisions in tune with the global economy can set the currency on the right track.

Interest rate risk

Interest rate risk is one of the four risks associated with the worldwide foreign exchange market. It is relevant to the currency options and swaps, outright forward deals and, currency futures. The discrepancies arising in the forex book by differences in the spreads, mismatches and, gaps of maturity resulting in a profit or loss is termed as the interest rate risk. When the spot and forward amounts differ the amount of difference is the mismatch. This happens because of the gap arising out of different maturity periods and the entire riddance of such gaps is hardly possible. If the mismatches are small enough this would not become as serious as it seems to be. A distinct swap is utilized every day when the traders balance their net payments and receipts for every traded currency, which is known as either next/tomorrow or rollover. The dealing authority could set limits on the gross amount of mismatches to minimize interest rate risk. Often the mismatches are segregated depending on their dates of maturity into prior six months and post six months. Other methods are also applied by different banks and dealers. The positions and profit/loss for all the dates of delivery are calculated by entering the transactions in computerized systems. The impact on the outstanding gaps could only be forecasted through constant monitoring and analysis of the interest rate environment.

Country risk

Another associated risk in the foreign exchange market is the country risk which can be stated as the government intervention to default payment to the receiver, as a result of which the receiver could be bankrupt or insolvent. In other words except for the major economies of the world, government controls on foreign exchange transactions and the restrictions on the free flow of forex exists. For this reason the traders should have sufficient knowledge of any change in those countries forex policy or they should be able to anticipate such restriction beforehand. In this way only this risk could be minimized. None the less the trading in currencies which faces such consequences of restriction would eventually dry up.