Currency strength expresses the value of currency. For economists, it is often calculated as
purchasing power
Purchasing power refers to the amount of products and services available for purchase with a certain currency unit. For example, if you took one unit of cash to a store in the 1950s, you could buy more products than you could now, showing that th ...
, while for financial traders, it can be described as an indicator, reflecting many factors related to the currency; for example, fundamental data, overall economic performance (stability) or interest rates. It can also be calculated from currency in relation to other currencies, usually using a pre-defined currency basket. A typical example of this method is the
U.S. Dollar Index (USDX).
Currency strength based trading indicators
There are two types of currency strength calculations: fundamental based, and price based.
Generally, price based currency strength is calculated from the
USDX, which is used as a reference for other currency indexes. The basic idea behind indicators is "to buy strong currency and to sell weak currency". If X/Y
currency pair is up trend, it can be determined whether this happens due to X's strength or Y's weakness. For the calculation of indexes of this kind,
major currencies are usually used because they represent up to 90% of the whole
forex
The foreign exchange market (forex, FX, or currency market) is a global decentralization, decentralized or Over-the-counter (finance), over-the-counter (OTC) Market (economics), market for the trading of currency, currencies. This market det ...
market volume.
In the minority of cases, fundamental based currency strength (also known as macro currency strength) is calculated from aggregating various leading economic reports, including but not exclusive to:
ISM Reports, Consumer Surveys (UMCSI),
Interest Rates
An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...
, and much more.
With indicators like above, one is able to choose the most valuable pair to trade; see the reactions of each currency on moves in correlated instruments (for example CAD/OIL or AUD/GOLD); look for a strong trend in one currency; and observe most of the forex market in one chart. The current trend in currency strength indicators is to combine more currency indexes in order to make
forex
The foreign exchange market (forex, FX, or currency market) is a global decentralization, decentralized or Over-the-counter (finance), over-the-counter (OTC) Market (economics), market for the trading of currency, currencies. This market det ...
movements easily visible.
Examples
Typical examples of indicators based on currency strength are
relative currency strength and
absolute currency strength (percentage). Their combination is called the "Forex Flow indicator", because one can see the whole currency flow across the forex market.
See also
*
Relative currency strength
*
Absolute currency strength
*
Balance of trade
Balance of trade is the difference between the monetary value of a nation's exports and imports of goods over a certain time period. Sometimes, trade in Service (economics), services is also included in the balance of trade but the official IMF d ...
*
Technical analysis
In finance, technical analysis is an analysis methodology for analysing and forecasting the direction of prices through the study of past market data, primarily price and volume. As a type of active management, it stands in contradiction to ...
*
Hard currency
In macroeconomics, hard currency, safe-haven currency, or strong currency is any globally traded currency that serves as a reliable and stable store of value. Factors contributing to a currency's ''hard'' status might include the stability and ...
*
Revaluation
Revaluation is a change in a price of a good or product, or especially of a currency, in which case it is specifically an official rise of the value of the currency in relation to a foreign currency in a fixed exchange rate system. In contrast, ...
References
{{DEFAULTSORT:Currency Strength
Technical analysis
Strength
Strength may refer to:
Personal trait
*Physical strength, as in people or animals
*Character strengths like those listed in the Values in Action Inventory
*The exercise of willpower
Physics
* Mechanical strength, the ability to withstand ...
Foreign exchange market