With markets becoming shaky and the American treasury note no longer seen as the pinnacle in safe investments, many investors big and small are turning to the Foreign Exchange or “Forex” market.This market allows for people to invest in the wealth of nations as a whole as opposed to various companies within a nation by investing in the currency itself. The Forex market works by having people make purchases of foreign currency in their native currency, in the hopes that, as certain nations improve and others decline, the exchange rate will produce a favorable profit. Forex markets have been most commonly used in developing nations to provide them with much needed foreign currency, resulting in significant gains as the company recovers from civil war, develops into the first-world, or otherwise advances itself socially and economically.
In order to successfully trade on the Forex market, it is important to understand international money theory and its ties to social and economic policy. The value of any one nation’s currency is determined by the demand for that currency combined with the belief that the currency will retain value and continue to be honored. This means that when a government accumulates more debt than it can pay, or when it begins to print money wildly to wipe out debt or pay for overextended programs, the currency will lose value. Forex investors, then, look to invest in currencies with low rates of inflation that are backed up by stable, long-term governments which treat the people fairly and are thus unlikely to be disturbed by social turmoil or political revolution.
A good example of this would be postwar Japan. After the Second World War, Japan’s economy was set to zero by American, British and Commonwealth attacks on its infrastructure and factories. As such, the Yen became almost worthless. However, once it began to stabilize, inflation began to stabilize and many countries began to trust the Japanese government and do business in its currency, driving up demand and value. Japanese currency continues to be seen as very valuable, despite subsequent recessions and disasters, because Japan has a robust economy.
Smart Forex investors therefore should look for such opportunities. Day traders focus on nations which are having very sharp or very quick changes, such as those undergoing political reform, beginning new lending practices, or taking powerful steps to eliminate inflation. Argentina, for example, managed to reverse its skyrocketing inflation around 2005, and by 2008 had managed to return to a very nominal rate of inflation. Smart Forex investors made money at the beginning by dumping Argentine currency when the collapse was imminent, then buying up currency once they believed the inflation reforms would work. The Icelandic Kroner was traded in the opposite way, with Forex traders funding the nation as the currency increased in value, then dumping it when it became clear that Iceland had no way of paying off the debt it had accumulated and that its currency was overvalued. Smart Forex investors thus keep themselves appraised of economic and social policy and thus invest accordingly.
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