Understanding the Relationship Between Currency and Stock Markets

Currency and stock markets are two of the largest financial markets globally, and studying the interconnection between the two is paramount for investors and traders. In other words, the stock market is a market that sells stakes in a company or businesses, whereas the currency market is a market of exchanging money for another.

Another major link between currency and stock markets is in its reaction to the news, central bank action, and geopolitical events. For instance, when a country’s central bank increases the interest rate, the value of that country’s currency will tend to go up hence making foreign investment costly. This may lead to a post-September deterioration of the stock of multinational firms that base their revenues on international sales and decline in the stock market as a whole. On the other hand, when the central bank of a country has cut down the interest rates, the value of the currency may go down possibly leading to higher investors’ demand of foreign stocks.

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However, the two are also correlated through forex trading that exist between stock and currency markets. This much is true because forex trading allow traders to invest in long or short positions on currencies which has a bearing to stock prices. Foreign exchange traders who invest in the hope of gaining value differences in exchange rates may place bets on such changes that could impact earnings of many international businesses. The forex traders are always in a position to hold negative expectations on a certain currency and this usually results in the short selling of the currency with adverse effects on the organizations that derive their revenues in that currency. As a result, the stock prices could also be reduced.

However, whenever the exchange rate between two currencies changes, it will also affect the amount of value of international assets and liabilities of a company and as a result it affects the company’s financial performance and its stock prices. The use of translation involves conversion of earnings in a foreign currency into a home currency: that is if a Company has so many assets and revenues in say dollar which a strong currency the Company’s profits will be boosted when converted back to its home currency. On the other hand, the business with its liabilities and expenses in a sound currency will record a decline in its profits. This impact can be magnified for firms extending tremendous operations in international financial markets and the switches in foreign exchange rates can result in volatility of stock prices.

It is possible to indicate that the observed dependence on the rate is bilateral, and the developments in the currency and stock markets are sure to continue for some time. It means that it is crucial paying attention not only to the domestic stock market but also the currency one, because changes in the currencies’ rate are reflected in the financial performance of a company and its stock prices. This way, traders and investors are able to make better decisions and build overall better financial profiles, all thanks to the knowledge of these interdependencies.