Foundations
An exchange rate is the price of one currency in another, and the foreign exchange (FX) market that sets it is the largest market on earth, trading around the clock. Currencies matter to every other asset because everything global is priced through them: a US investor’s Japanese shares, a Brazilian company’s dollar debts, a British reader’s oil price.
What moves exchange rates
Three forces dominate. Interest rate differentials: money flows towards higher returns, so a central bank raising rates typically strengthens its currency (and expectations of moves matter more than the moves themselves). Trade and investment flows: persistent buyers of a country’s goods or assets are persistent buyers of its currency. And risk appetite: in stress, money runs to the dollar, yen and franc regardless of yields. On any given day one of the three regimes is in charge, and identifying which is half of FX analysis.
Strong and weak: who wins from each
A strong currency is not simply good news. It cheapens imports and tames inflation, but squeezes exporters and cuts the value of overseas earnings (a genuine headwind for US multinationals when the dollar surges). A weak currency flatters exports and foreign earnings while importing inflation. Governments therefore have complicated, often unstated preferences, and accusations of engineering weakness are a recurring feature of trade politics.
Why currency moves transmit crises
Currencies are where global pressure concentrates. Emerging markets that borrowed in dollars face rising real debt burdens when the dollar climbs. Carry trades borrow cheap currencies to fund positions everywhere, so a sharp funding-currency rally (the yen in August 2024) forces liquidations across all assets. And because FX trades continuously, it is often the first market to reprice a shock while others sleep. When commentary says “the currency is doing the tightening”, it means the exchange rate has become the channel through which policy or fear reaches the economy.
Where you’ll meet this in our coverage
The Yen Carry Trade Unwind: How August 5, 2024 Shook Global Markets
Liberation Day Tariffs: Markets Plunge on Sweeping IEEPA Tariffs
Go deeper: The Yen Carry Trade, Explained