In the same manner that markets or current political conditions affect the price of stocks and bonds, the same can occur with the valuations of currencies traded on the foreign exchange. If a nation’s central bank were to cut its interest rate, perhaps in response to an economic event such as inflation, the resulting ripple effect would be felt throughout the foreign exchange markets.

Currencies are traded to support or match possible interest rate changes, particularly if the interest rate hike (or cut) begins in a country with an influential currency, an example: the U.S. dollar.Other factors that affect foreign exchange trading could be political circumstances, current market conditions; and even a regional political climate, virtually anywhere in the world, could create a ripple effect throughout the Forex.

Political disorder in any particular country could even produce an immense move by market participants away from their own currency, thus causing a destabilization within the currency. Similarly, if peace or order is reinstated in a certain region, it acts as a stabilizing agent in the currency exchange, especially those currencies used in said regions.

 Is there regulation within foreign exchange trading?

There are two predominant factors that make regulation on the Forex nearly impossible. The main factor is due to the absence of a worldwide, central marketplace. Essentially every country makes its own market. Any border-crossing transactions help create a fluid, yet decentralized structure for foreign exchange trading.

The other main reason that there is no regulation is the nature of the very currencies being traded. Every currency traded is bought or sold based on its own exchange rate. This creates a large number of interrelated, yet individual currency markets that are dependent on one another for value. Because there is a lack of a centralized organization or governing force, the industry is not regulated, nor does it have any standards that guide how to conduct business.

The foreign exchange market is much more complex than as written above. However, this introduction should provide valuable information as to the importance of our global markets and how it affects our own daily investment decisions.