Fundamental analysis

The value of a currency in a given point of time could be affected by short term trends, which are studied in technical analysis; but ultimately the value of a currency is a result of the economic performance of the issuing country.

The most widely used indicator of the health of a country's economy is the GDP (Gross Domestic Product), or how much the products and services of an economy are worth. In formula terms GDP = Consumption + Investment + Government Spending + (Exports - Imports).

For developed countries, consumption of durable goods, non-durable goods and services is generally the biggest item. For United States, it accounts for more than 70% of the total. Investment includes the deployment of capital in exploration, facilities and machines to generate future proceeds. It doesn't include change of ownership. Purchase of housing is considered as investment but the purchase of financial securities (shares) is not, to avoid double-counting. Government spending doesn't include welfare transfers.

The value of a currency is affected by the GDP since it's settled in open market i.e., the value is set when demand and supply are in equilibrium.

If too much of a currency is offered (for example to pay for a spike of imports), its value should decrease while if there's a big export surplus, there would be more foreign money chasing the same amount of local currency, pushing the value of the currency up.

The exchange rate is the price of a country's local currency in terms of a foreign currency; the second one is called reference currency. At the same time a currency can have two different values, a spot rate, or exchange rate of today and a forward rate, an exchange rate for delivery sometime in the future.

In a freely floating exchange rate system, where government doesn't intervene, the value of a currency depends on the demand of goods and services from partners. If a German goes to Tokyo, he must pay in Yen for his food and electronics and he exchanges his euros, generating demand for yen.

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