Erratic currency movements - RegaL Core Markets

 

Forex is the world’s largest and most liquid financial market, and cash is traditionally known as a safe haven investment just like gold. However, some investment advisers argue that cash has become less palatable since interest rates fell to almost zero during the 2008 global economic crisis. Returns on cash investments have been declining recently because of the inevitability of interest rate cuts.

During economic difficulties, central banks tend to lower interest rates in an attempt to stimulate economic activity. Lower rates promote borrowing and investing, especially by businesses, which means more money is injected into the economy. This in turn facilitates growth.

In the investor’s perspective, higher interest rates are preferable. “In most cases, when a country raises its interest rates, the country’s currency gets stronger in relation to other currencies as assets are shifted away from it to gain a higher return elsewhere, ” says in a market research by Regal Core Markets. The pandemic and recession double whammy is making higher interest rates unlikely, though.

Still, the demand for currency, especially the US dollar, appears to defy expectations. One of the notable reasons for this is the rising unemployment figures. According to Leung, the extremely sharp increase of unemployment that resulted from the lockdowns leads to increased demand for the US dollar. Many investors still see the US dollar as a safe haven asset.

It’s still too early to decide whether or not this growing demand is good. The movements in US dollar demand, Leung says, are based on short-term gauges, which do not take into account the effects of long-term factors such as massive government borrowing.