Political and Economical performance

Politically stable countries with strong economic performance are highly attractive to investors. Political turmoil, on the other hand, can cause the loss of confidence in a currency leading to devaluation of its currency. A good example is Zimbabwean dollar. When it was introduced in 1980 to replace the Rhodesian dollar, it was among the highest valued currencies in the world (1 ZWD=1.47 USD). In less than 30 years, political turmoil and hyperinflation rapidly eroded its value to the extent that the government had to issue trillion-denominated notes. Eventually the Zimbabwean dollar was abandoned on 12 April 2009 and the government uses US dollar for official transactions.

The greatest impact on the currency markets is the U.S. release of the monthly (or quarterly) economic statistics, followed by that of euro zone countries, Japan, Britain, and finally to Australia, Canada, and Switzerland. The dominance of U.S. is because the greenback, being the most important currency in the international foreign exchange market, accounts for over 50% settlements of international trades. The economic statistics in the order of importance are adjustment of interest rates, employment (the U.S. non-agricultural employment), gross national product, industrial production, foreign trade, inflation rate, producer price (price) index, consumer price index, wholesale price index, retail price index, the consumer confidence index, new residential construction index, personal income, car sales, the average wage, and business inventories. This order, however, is only for a general market situation. In different market psychology, the impact of these data may differ.

Economic growth and Outlook

We start easy with the economy and outlook held by consumers, businesses and the governments. It's easy to understand that when consumers perceive a strong economy, they feel happy and safe, and they spend money. Companies willingly take this money and say, "Hey, we're making money! Wonderful! Now... uh, what do we do with all this money?"

Companies with money spend money. And all this creates some healthy tax revenue for the government. They jump on board and also start spending money. Now everybody is spending, and this tends to have a positive effect on the economy.

Weak economies, on the other hand, are usually accompanied by consumers who aren't spending, businesses who aren't making any money and aren't spending, so the government is the only one still spending. But you get the idea. Both positive and negative economic outlooks can have a direct effect on the currency markets.

The Government: Present and Future

The years 2009 and 2010 have definitely been the years where more eyes were glaringly watching their respective country's governments, wondering about the financial difficulties being faced, and hoping for some sort of fiscal responsibility that would end the woes felt in our wallets. Instability in the current government or changes to the current administration can have a direct bearing on that country's economy and even neighbouring nations. And any impact to an economy will most likely affect exchange rates.

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