Currency Market Turbulence

Turbulence or Excellence in Currency Markets

Currency markets have the highest liquidity in the world. This is due to a number of factors. Most of the major currencies are freely convertible currencies like the US Dollar and the Euro. This one factor alone makes them a safe investment haven. Several factors determine the strength and liquidity of currencies – interest rates charged by banks.

How It Works

More often the attractiveness of a market and currency are primarily determined by interest rates offered by banks. If one can get a higher interest rate even 2% points the currency becomes more attractive as an investment tool.

The US Dollar has always been a benchmark excellence in currency markets for a long time and is the most accepted mode of payment across the world. For a while, there was some turbulence in the currency markets due to bank closures and the housing bubble. Most often, risk aversion is a major consideration for investors and the US dollar is still the most attractive currency as far as investing is concerned. There is also global sentiment as a driving factor in this sector.

The Euro has also been seen some turbulence – considering the fact that it is common currency for 15+ countries and if one of the countries is in trouble, it has the potential to upset the balance. That is exactly what happened with Greece, Spain and Portugal. Since markets and economies are integrated across the world, small ripple is experienced all across the world.

What It Means

Multiple factors come into play when one is considering the excellence in the currency market. It is advantageous for exporters to have a slightly weaker currency as it makes their goods more attractive, makes it easier for these countries to get foreign direct investment for major projects, makes export of software and services cheaper, to name a few. The Chinese Yuan/Renminbi has had a fantastic run and the country has seen spectacular growth in the last few years. Their balance of payments situation is very healthy – they have a lot of money to invest in other economies.

What It Means for India

The Indian Rupee was doing very well in currency markets but has seen turbulence in the last year. On average, India had received 26 billion dollars in investments in various projects and it has declined in 2011 due to a lack of demand for Indian stocks. Several factors come into play for turbulence in the currency market. Here the major factors have been inflation, lower interest rates and higher demand for essentials like crude oil and a balance of payments imbalance. The Rupee is not a freely convertible currency and due to this and other factors, renewal of loans is going to be challenging in the next few years. All in all, things should turn around as governments are taking proactive steps in addressing issues on a local and global level.