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How To Identify Strong And Weak Currencies?

Are you an ambitious, venture trader with a strong interest in foreign exchange trading? Read this article to get a better understanding of strong and weak currency trading principles.

How can you identify when a currency is strong or weak?

Let’s start by talking about the most important facts. 

When there is a decrease in the value of a country’s currency, always compared to other currencies, then that currency can be seen as a weak currency. It’s also important to point out that a weak currency is often thought to be found in countries with poor economic foundatıons, but with fairly strong export activity.

What’s the correlation between private companies, the government, and their impact on international markets?

“It is vital to look at the economic foundation of specific countries to determine what type of currency characteristics are required. For example, high exporting countries such as China prefer to have weak currencies as this is what companies within the economy require to operate efficiently. 

Whereas, high importing countries benefit from a strong currency as this results in cheaper goods for companies, for example, the UK. If the currency is priced appropriately in accordance with economic requirements, it can support  sustainable economic growth.” Michalis Efthymiou, eXcentral’s Market Analyst said.

Several factors can contribute to a weak currency but at this moment it’s good to note that a weak currency could also have benefits. That’s why several countries may prefer to maintain their currency weaker. These, as a simple reference,  may give you further food for thought.

Well, returning to the essence of things, substantially weak currencies often share some common characteristics such as a high inflation rate, deficit budgets and a minimum growth rate.

Now, what defines a strong currency? The increase in the value of a country’s currency against other currencies. 

A strong currency can have advantages but also disadvantages. Cheaper trips abroad and less costly imports are some of the benefits of a strong currency, while export activity can be considered a disadvantage due to higher purchasing value of products – a strong currency makes the goods of a country more expensive, with a negative long-term impact, which could essentially shift consumers to cheaper markets.

Michalis advises investors to listen to central bank comments on financial requirements

“Without a doubt, strong currencies have both advantages and disadvantages, this is why central banks concentrate largely on keeping the currency exchange rate at a price which best benefits the economy. This is why it is important for traders to listen to comments made by the central banks regarding economic requirements, interest rates and inflation, as these are all linked to the exchange rate. 

Traders also have the ability to view and analyse currency indexes such as the USDX or EURX to obtain a stronger understanding of the currency’s current strength or weakness”.

Reading the above, it’s understandable that strong and weak currencies have multi-trading potential. To create integrated strategies, you need to go deeper and that’s exactly what this article aims at, to help you start analysing better.

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