Understanding Currency Trends: How the major trends are created
Online forex is the realm of speculators. Every trader has his ideas on what distinguishes today’s trading from yesterday, and any commentator
will have his opinion on what causes this or that movement on a typical day of trading. Shall we, then, reach the conclusion that forex analysis
is the field of fantasy and theorizing where even the most basic facts require an extraordinary degree of convincing before they are agreed to
by everyone? Not necessarily, because money supply, of all, things, is uniquely determined by the governments, and it is possible to build
credible and solid theories on this basis alone, even if they will not be sufficient for our day-to-day experience. In this article we take a
look at the powerful role of intergovernmental agreements in determining forex trends.
Through interest rates, governments control the underlying trends in the currency markets. That is a well-understood fact. Nobody will lend at
a cheaper rate than the government on a sustained basis, and as such, the central banks have the power to refresh or choke an economy at will,
at least on a longer term basis. Yet interest rates change all the time, and they rarely create the kind of long term patterns that explain how
some trends can last for years, if not for decades in some cases. Although such trends can have a multitude of causes, we often discover major
international agreements, and commitment of governments to each other lying behind such long-term price dynamics.
During the Cold War era, for example, there existed a complex set of international agreements aimed at bailing out the American economy at all
costs, especially in case that the dollar lost too much of its value at a too-quick pace. This ensured that, even in cases where the fundamentals
of the U.S. economy were weakening, the currency could manage to appreciate, ensuring the resilience of the U.S. system as the bulwark of the
Western World against the perceived communist threat.
The agreement between the Danish central bank, and the ECB is another good example of how an utterly credible peg can be established when the
central banks on both sides of the agreement decide to throw their full backing behind it. We also witness major trend changes in almost all
currencies at precisely the points where the central banks in question make an explicit and public comment to back this or that policy on a
mutual assistance basis. The coordinated interventions of the ECB and FED, for example, to sustain the Euro against the possibility of further
losses signaled the beginning of a decade long appreciation for the European currency. Similarly, several international conferences about the
value of the dollar in the 80s determined the beginning and end of some multi-year trends in the global markets.
Thus, any analysis of trends in the global market must begin with the political will that stands behind the scenes and its toleration of emerging
patterns in the freedom of trading. To this purpose, you need the aid of some fundamental news provider, and the
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