Currency strength expresses the value of currency. For economists, it is often calculated as
purchasing power
Purchasing power is the amount of goods and services that can be purchased with a unit of currency. For example, if one had taken one unit of currency to a store in the 1950s, it would have been possible to buy a greater number of items than would ...
, 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
A currency pair is the dyadic quotation of the relative value of a currency unit against the unit of another currency in the foreign exchange market. The currency that is used as the reference is called the counter currency, quote currency, or ...
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 decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all as ...
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, th ...
, 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 decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all as ...
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
The balance of trade, commercial balance, or net exports (sometimes symbolized as NX), is the difference between the monetary value of a nation's exports and imports over a certain time period. Sometimes a distinction is made between a balance ...
*
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. Behavioral economics and quantitative analysis use many of the sam ...
*
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:
Physical strength
*Physical strength, as in people or animals
* Hysterical strength, extreme strength occurring when people are in life-and-death situations
*Superhuman strength, great physical strength far above human c ...
Foreign exchange market