Alan's Forex Blog

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Why It Pays to Understand Currencies (Forex) Posted: 04 Sep 2010 10:00 AM PDT By Kat Von Rohr (Original Source) A little-known fact in the investment world… All the savviest institutional stock traders, asset managers, and brokers understand currencies. They may never trade a single pair in the foreign-exchange market…but they still understand how currencies move and shift around the world. That includes the big-shots like Warren Buffett…George Soros…Jim Rogers…etc etc. Frankly, you have to understand currencies if you want to gain an edge in the markets. There are several reasons why… 1. Easy Extra Profits: Next to dividends, simple currency appreciation is one of the easiest ways to earn extra profits off stocks or bonds. For instance, say you love an Australian gold mining company. Let's say you bought when the dollar was strong and the Australian dollar was weak. Over the four months you owned the stock, the Australian dollar rallied 15% against the U.S. dollar. Once you sold that stock, and converted back to dollars, you would find you earned that extra 15% without even looking at capital appreciation (not counting fees/taxes etc). 2. You Know Where Money Is Heading Next: Once you understand currencies, you understand how money moves and shifts around the world. Or in investment-speak, you understand "capital flows." You know which country will get the wind-fall of investment dollars yet. That helps you target the best countries for stock and bond purchases. 3. If the Dollar Rises, Then… Many investors follow currencies just to see how other markets will react. For instance, it's a recognized fact in the stock world, that if stocks rise, the dollar will fall and vice versa. If certain commodities rise, the dollar is likely to fall and vice versa. If Treasury prices rise, the dollar is likely to rise too as a "safe haven." If a foreign currency quickly spikes in value, the local companies tend to suffer because they are not as competitive in the global market. Now does it always happen that way? Unfortunately not. But it's a good guideline to start with, as an investor. Again, it pays to understand how currencies move and shift. Next time you make any investment – whether it be stocks, bonds, commodities, even real estate – think about the local currency performance. It will affect your long-term profits. Share and Enjoy:

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