Saturday, September 5, 2009

speculation affect on exchange rates

exchange rates also are profoundly affected by speculation over future currency values. Brokers, dealers,and investors in foreign exchange monitor the currency markets daily, looking for profitable trading opportunities. A currency viewed as temporarily undervalued will quickly bring forth numerous buy orders, driving its price higher vis-a-vis other currencies. A currency considered to be overvalued will soon be greeted by a rash of sell orders,depressing its price. Today the international financial system is so efficient and finely tuned that billion of dollars can flow across national boundaries in a matter of hours in response to speculative fever. As we saw earlier in our review of the Eurodollar market, these massive unregulated flows can wreak havoc with the plans of economic policymakers because currency trading affects interest rates and the money supply.

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