Day Trading & Forex Forum

pips_lady

I just wanna ask how does inflation affect the price of currencies and why?

Thank you..

gerasmus

Inflation is caused by an increase in the money supply. More money chasing the same amount of goods/services.

Gold is real money, also a currency. When the price of gold goes 'up' it actually means that the value of paper money is going down in value against gold.

Governments use inflation to create imagninary wealth. Increasing the price of assets (like the massive housing bubbles).

Also, the current credit crises if far from over. In fact, the worst is yet to come.
You may have heard about money (liquidity) pumped into the financial system (and adding money to the current supply = inflation) due to the 'credit squeeze'.
I believe that the central banks caused this mess in the first place and now they are trying to inflate out of the mess. In the process destroying currencies. Together with all the loads of derivatives and other crap that cold, heartless bankers on trading floors shove down to uninformed masses.

Would you like to hold assets in a currency that is loosing value ? The American dollar has lost around 30% of it's value in the last 4 years or so (i'm not exacly sure the years, it may be 3 or 4 years) against other currencies.
Would you like to invest anything in a country where your investments are destroyed by inflation ?

Low sustained interest rates at almost zero percent has caused an real estate bubble, consumer debt levels, trade deficits, financing war in Iraq.

The link below should clearly explain as an answer:
Rude Awakening » Blog Archive » The Great Flood…Of Money
Money & Markets: Free Investment Email Newsletter

Trader333

It depends what you mean by destroying currencies as this has to be relative to another currency. In the case of the USD then yes it has lost value against the Euro and GBP but this is not entirely surprising as the policy of the ECB and BOE has been very tight compared to that of the FED and you are seeing the end result of it. I think that the GBP will also suffer against the Euro in the long term. The UK has seen huge house price inflation and people have used the increase in equity of their properties as ATM machines to spend spend spend which has financed economic growth. This is all about to come to a very abrupt end caused by the credit squeeze, falling property values and the fact that many people's fixed rate mortgages are about to end with huge increases in monthly payments. I know of several people earning over £30K a year who already cannot afford their mortgage and loan repayments and whose payments in January are about to take a hike upwards.

Another friend of mine who has a lot of contacts in the property market is telling me of many "buy to let" cases where they are having to sell their properties because the lenders will no longer finance their business on shoestring loans.

In my view the UK is heading for recession which would already be upon us had people not been able to spend money financed by property price increases.


Paul

zambuck

Good posts....This is my two bit worth...

US actually wants the dollar to fall and US wants to keep the Interest Rates low......

They know that China and Gulf States are sitting on huge reserves and they can't abandon the Dollar, they WILL HAVE to keep with it....China will keep rampaging ahead......American's will keep buying their goods - their biggest buyers in world.......

US is looking at what the US Shoppers do - and want to keep them happy - not where the global economy may head....or Dollar rate...

S & P 500 Weekly Index is a lot higher than S & P 500 Weekly Index priced in Euro....Rising Stock Market is best way to counter the falling house prices....

Best way to counter problem with Dollar is to stick with any Currency rampaging against the Dollar...for a while

Interest rates cuts are on the way I think.....Canadian have done it....Next will be US and UK...

Of course I have been known to be wrong...!!

__________________
zambuck

The most futile and disastrous day seems well spent when it is reviewed through the blue, fragrant smoke of a Havana Cigar.
Evelyn Waugh.

gerasmus

It may also just come to the day that the Chinese (and other Asian countries) have large enough internal consumer spending that they don`t need the dollar any more. They might then just decide to drop the dollar àssets`. This might cause an sort of hyper inflation in USA, big shock to American economy. If Bush pisses of Asians enough they might just decide that they will take a knock but in the process rid them of the World Police (Bush and cronies).

US consumers are so deep in debt (and probably Britains as well) that they just don`thave any more money to spend. Consumers just can`t get further into debt.

As soon as `investors` wake up (and stop watching and eating the beautifull picture painted to them by Bloomberg and Fox news) there might follow a dollar panick. Anyone with a dollar denominated asset would wanna get rid of it. The frenzy feeding on itself, making it even worse.
All that Chinese and Japanenese bonds might find it`s way back home, in real estate. Foreigners (Japs and Chuppies) start to buy up American properties, driving up the dollar prices.

Other currencies (GBP, Euro, yen etc) might benifit from the dollar panick.
The difference between US and EU interest rates also affects exchange rates in some degree.

Inflation got a knockout blow in the late 80 from Paul Volcker (then Fed chief) and also here in Uk with high interest rates which killed inflation. A pperiod of stability followed, low interest rates.. the recipe for a bubble. A (so called) economic `miracle`was born.

Inflation, in my view, is a absolute evil. Things should be getting CHEAPER, not more expensive !
I myself am average Joe, earning a far above average wage... but still not enough to even afford to buy a 2-bed flat in London Zone 4/5. Obviously I haven`t benifitted from the property price inflation.
Honestly, a housing crash would be welcome in my view - At least for those those lucky few (and I`m one of those lucky few ) of us who are completely debt-free. With investments protected against a housing bust, there would be good bargains.

The Fed WANTS the dollar to go down because how else are US gonna get out of their foreign debt, pay for MediCare, etc ?

Do you believe the government when it publish the inflation statistics ?
Hell NO !
- With how much did your energy bill go up ? probably more than 2 or 3%
- If the oil price almost have doubled in last 12 months, what happens to the transportation costs or costs of food production ? Evaporate ?
- This same government and Bush lied about Iragi WMDs. Would you believe their inflation statistics ?

I`m still in my early 30`s, can barely remember they `87 stock crash, gold reaching $850 in 1980 but seems like most investors can`t even remember yesterday.

I don`t work in financial indfustry and have nothing to do with financial industry. The general public have had the wool pulled over their eyes.
BTW, have a look into the future when the whole cardhouse built on derivatives (CDO`s and other incomprehensible terms)

There is one saviour for Amrican politics, in the man of Ron Paul. Presidential candidate 2008.

Have a look at this:
Have a look at at today`s: Rude Awakening

Rhody Trader

I don't think this question actually got answered, thought it does seem to have served as a launching point for a parallel discussion.

Inflation is basically the process by which a currency loses value relative to the goods and services it is used to purchase. The higher the rate of inflation, the fast the currency loses buying power.

Now in terms of the forex market, all other things being equal (which they almost never are), a currency with a higher inflation rate will tend to depreciation against ones with lower inflation rates.

Here's an example. Currency X has an inflation rate of 10% and Currency Y has one of 5%. Assume that Commodity Z starts the year worth 100 of each Currency, meaning it would take 100 Currency X or Currency Y would buy 1 unit of Commodity Z. That means the X/Y exchange rate would be 100:100. After one year, inflation would mean that it would take 110 Currency X to buy Commodity Z and 105 Currency Y. That means the X/Y exchange rate goes to 110:105, so Y has appreciated against X.

So a country suffering from high levels of inflation not only sees the buying power of its currency decline, it also sees the value of its currency against others drop.

__________________
John Forman
Author - The Essentials of Trading

pips_lady

wow! what a post...

First, I wanna thank you for all the replies.. Your really gave me an idea on how to visualize inflation.. Well, it is not just a "piece of cake" because it really would affect not only the price of the currencies but also the economy as well..

Trader333

This view is not in line with others and according to the statements on this subject on ForexFactory, inflation is likely to make a currency increase in value. Here is the quote:




Paul