Developing nations are trying to in maintain a stable exchange rate for their currencies. However, developed countries do not seem to have the same view. Why so?

Lately, we often heard leading central banks' officials remarked that a certain currency is too strong or better if it is weaker. On the other hand, central banks in developing countries such as the Fragile Five, are struggling to stabilize their currency exchange rate at a certain strong level. Why do their counterparts in developed countries not see it as a good thing?

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Lessons From Japan

History of Japanese economy has given much to be learnt by modern monetary policy analysts. First, a contracted economy where inflation rate and domestic business activities continue to decline is a signal that the economy enters recession period. Second, an overtly powerful exchange rate will hurt the country's exports, and in the long-term could lead to slowing national production and end up in negative growth. For almost a decade, Japan ignored their declined inflation and currency appreciation till they arrived at a point where the economy is too ill to move forward. PM Shinzo Abe with his Abenomics have done a string of expensive plans, but it is clear that it is difficult to recover what has already lost. More than a year have passed since Abenomics announced, but Japan economy is not yet shown much improvement.

The two lessons now became a phantom in the financial realm. Let's take European Union for example. No matter how many times the ECB governor and officials said that they don't see any deflation, investors and other market players are still worried simply because there is no hard proof of a recovered economy yet. On another, leading central banks have taken an important note from Japan episodes, that is,don't let your currency to be so strong.

Throughout the year 2013, Reserve Bank of Australia's Governor, Glenn Stevens, repeatedly said statements that disparage AUD. He even purposefully cut back Australia's interest rates several times in order to do that. Those efforts successfully put Aussie on the list of worst performed currency. It made sense because with China slowdown growth on the way, Australia would have to seek other opportunities to expand their markets. If their prices are too high to compete due to expensive exchange rates, then they will lose their edge.

 

Because Of Online Forex Trading?

Last week, following the Bank of England's decision to withheld interest at low rate, BoE Deputy Governor Charlie Bean said that sterling has upped to almost 10% over the past year, and if it strengthen any further then it could hurt UK's export industry. An exceedingly strong GBP would make Made in UK stuffs become more expensive and difficult to be sold abroad. As the result, exports will be pushed down and economic recovery become much more complicated. That's why He claimed that stronger GBP will make BoE increasing their interest rates.

Of course, there must be other reasons why BoE holding back, for instance if people are afraid that an interest rate hike will bring about worsening unemployment record. The effect of such policy on forex market is instantenous and highly multiplied since online forex trading rife all over the world. Consequently, policy-makers are moving more carefully. In the old days, interest rate decision is merely linked to domestic credit, employment, and foreign investors appeal, but now it is also important to consider whether a currency is strong, weak, or somewhat in between.

How do we know the strength of a certain currency exchange rate? In our opinion, it comes down to two points, that is its rate against the USD, and its position on currency index. Currency indexes such as that which provided by Bloomberg and Down Jones FXCM Dollar Index are indexes attained by weighting a certain currency against a basket of other currencies. Currency indexes could be used both in fundamental and in technical analysis with the help of other indicators. The higher it is on the chart mean that it experiences appreciation. When the index touch a new resistant, it could signal reversals. When the index meet several lows, it could indicate a chance for reversals. Learn more about this, and happy trading to you!