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In short, the globalization of the economies over the years have increased the
importance of currency trading. The U.S. dollar is regarded as a popular currency
in the international marketplace among other currencies.
Understanding how the currency market works can be useful for personal investors
because apart from the currency speculators, key players such as investment managers,
institutional investors, the exporters and importers, and central bankers use them.
The currency market is a complex market. In simpler terms, it is the marketplace
where people carry out their currency transactions. For example, if you want to send
some money over to your child studying in the U.S., you are likely to convert the
local currency to U.S. dollars.
Currency appreciates if its exchange rate increases - buying more of another currency.
It is depreciating if its exchange rate drops. As a volatile asset, currency is affected
by various factors.
Political and financial troubles are normally the main reasons behind the weakening
of currencies. For example, factors such as domestic political wrangles, non-performing
stockmarkets, overshooting property sectors, swelling deficits and the effect of
high interest rates on an economy fluctuate currency trading.
Stable currencies are what most central bankers want as they bring confidence and
attract foreign investments and the Asian economic growth miracle over the past years
owes much to currency stability. But in reality, things may not be always so smooth
all the time.
When there are currency woes, market participants such as multinational corporations
exporters/importers, and investment managers would hedge their currency risks accordingly
to minimize the possible negative impact.
For an investment manager who invests internationally, improper handling of currency
risks could wipe out a significant portion of the portfolioís return as the value
of the investment could be affected.
Good economic fundamentals are favored but this should not always necessarily argue
for a strong or stable currency in todayís complicated financial environment. To
support this, amid a backdrop of positive fundamentals and the fact that it is different
from the beleaguered Thailand economy, Malaysia was not spared from the recent heavy
speculations against the Ringgit. Table 1 shows the recent volatility of the Ringgit.
As Malaysia strives to become a regional financial centre, the issue of volatile
foreign exchange or currencies is unavoidable. If diversify your investment portfolio
across international borders, be sensitive to any development in the foreign exchange
as any movement in the rate of currencies affects whatever return you obtain from
your investment.
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