It is essential to understand that Forex is a market that plays out in
everyday life in a way that other markets do not. A fluctuation in
currency value can have an impact on a nation’s social, political,
and economic conditions. In extreme situations, a nation’s entire
political structure can be shaken to the core.
Because of these high stakes, a government often uses all its
power to control the value of its currency. It may decide that to
protect its private citizens from international traders and stabilize
its economy the government needs to control how its currency is
traded. China, for example, has “pegged” its currency to the U.S. dollar,
meaning that it has set a tight conversion rate of $1 to 7.27 yuan.
This peg has defied market forces, which are pushing for the
yuan to float against the dollar because of the huge trade imbalance
between the two countries. But China has kept the peg, worried
that simply allowing its currency to appreciate against the
dollar would damage its economic growth and possibly throw its
tightly monitored society into turmoil.
Japan also exercises strong control over its currency, unlike its
developed counterparts, the U.S. and Europe, which allow their
currencies to float more freely. At its basic level, Japan is an exportdriven
economy that understands currency fluctuations. Exports
powered Japan Inc. through the ‘70s and ‘80s. There are two ways
for an export country to stay competitive: be innovative or be
cheaper than the competition.
Japan had been both, and it ruthlessly grabbed market share
and put American competitors out of business. In the early ‘90s,
however, that began to change. The yen rose in value, and even
cheaper and nimbler competitors appeared in Southeast Asia.
Suddenly, Japan Inc. began to lose its luster. Japanese companies,
like their American competitors a decade before, were forced to
send work overseas, and unemployment mounted. Japan, however,
had a tightly knit society that could not sustain these shocks. The
country has since decided not to allow its currency to rise too
sharply. In 2003 alone, the country intervened in markets eight
times to manage its currency fluctuations. It bought billions of U.S.
dollars and sold the yen, thereby helping control the value of the
U.S. dollar/yen trade.
Traders must realize that when they take a position on the
Japanese yen—or any other country’s currency, for that matter—
they are dealing with a government that sees the value of its cur-
rency as an essential tool to protect its economic and social stability.
Even a Forex trader who uses purely technicals to trade must
beware of these unique factors and of the broader lesson that currencies
are not just another investment to be traded.
If a stock plunges one day, it may be damaging to some
investors. If it’s a bellwether stock, such as Intel, it might lead to a
market sell-off that hits a lot of investors in the wallet. Eventually,
this might play out by signaling that the economy is slowing down,
with all the accompanying pains that such a slowdown brings. But
unless a stock market crashes in dramatic fashion, people continue
to live their lives, mostly oblivious to or uncaring whether the market
is up or down from day to day.
Fluctuations in the Forex market, however, can have an
immediate effect on people throughout society, no matter how
rich or how poor. A change in the foreign exchange rate can mean
that middle-class luxuries such as cars and houses are suddenly
too expensive. A more severe change can make it difficult to feed
one’s family.
Source: Forex Revolution: An Insider's Guide to the Real World of Foreign Exchange Trading
