Other Factors
Other Factors
A variety of other factors could cause exchange rates to change. One important determinant in a world of political and economic uncertainty is that of confidence. During times of turmoil, people prefer to hold currencies that are considered safe-haven currencies. During the early 1980s the U.S. dollar was considered a safe-haven currency, and this perception was an important source of its strength. In 1990, after Iraq invaded Kuwait, the dollar strengthened a little because of the safe-haven concept, but weaker economic fundamentals eventually forced the dollar down. When the Mexican peso began to slide in the early 1980s, local investors transferred large amounts of pesos out of Mexico via dollar transfers until the Mexican government clamped down. The investors had no confidence in the peso and preferred to hold dollar balances outside of Mexico.
In addition to the basic economic forces and confidence in leadership, exchange rates are influenced by a number of technical factors, such as the release of national economic statistics, seasonal demands for a currency, and a slight strengthening of a currency following a prolonged weakness or vice versa. For example, in late 1990, the following comment followed a moderate strengthening of the dollar in a period of dollar weakness: "Many traders and currency analysts insist that sentiment about the dollar remains bearish and argue that buying spurts seen recently were simply a correction before selling resumes. But the dollar's downward momentum has clearly slowed. Buyers tend to snap the dollar up whenever it falls too far too fast, causing violent trading action at lower levels and indicating that a bottom may be forming, traders contend.
A variety of other factors could cause exchange rates to change. One important determinant in a world of political and economic uncertainty is that of confidence. During times of turmoil, people prefer to hold currencies that are considered safe-haven currencies. During the early 1980s the U.S. dollar was considered a safe-haven currency, and this perception was an important source of its strength. In 1990, after Iraq invaded Kuwait, the dollar strengthened a little because of the safe-haven concept, but weaker economic fundamentals eventually forced the dollar down. When the Mexican peso began to slide in the early 1980s, local investors transferred large amounts of pesos out of Mexico via dollar transfers until the Mexican government clamped down. The investors had no confidence in the peso and preferred to hold dollar balances outside of Mexico.
In addition to the basic economic forces and confidence in leadership, exchange rates are influenced by a number of technical factors, such as the release of national economic statistics, seasonal demands for a currency, and a slight strengthening of a currency following a prolonged weakness or vice versa. For example, in late 1990, the following comment followed a moderate strengthening of the dollar in a period of dollar weakness: "Many traders and currency analysts insist that sentiment about the dollar remains bearish and argue that buying spurts seen recently were simply a correction before selling resumes. But the dollar's downward momentum has clearly slowed. Buyers tend to snap the dollar up whenever it falls too far too fast, causing violent trading action at lower levels and indicating that a bottom may be forming, traders contend.
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