How currencies move
Currencies move mostly on relative interest rates and relative safety, not on how well the country is doing.
Understand the second bet you take whenever you buy a foreign share.
How currencies move works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
One number, four consequences
A rate is the price of the future. Move it, and everything whose value sits in the future is repriced, which is why growth companies fall hardest.
- 1
A currency is a price like any other
It is set by who wants to hold it. If more people want pounds than want to sell them, the pound rises. Everything else is a theory about why they would want to.
- 2
Interest rates are the biggest single driver
Money flows to where it is paid most, adjusted for risk. If one central bank raises rates and another does not, capital moves, and the currency of the higher payer strengthens. This is most of the day-to-day movement.
- 3
Fear is the other one
In a crisis, money runs to whatever is perceived as safest, historically the dollar. This means the dollar often strengthens during a global panic that originated in America, which offends people's sense of justice and is nonetheless what happens.
A strong currency is not a compliment. It makes exporters less competitive, which is why some countries work quite hard to avoid one.
- 4
And it silently changes your returns
A foreign share can rise 15% in its home market while you lose money, because the currency fell further. Over decades this mostly washes out. Over the period you actually hold it, it may not, and nobody warned you that you had taken a currency position.
You can name the currency exposure inside every foreign holding you own.
Read next
Currencies move mostly on relative interest rates and relative safety, not on how well the country is doing.
Screens for the UK, the JSE, Japan, India, China and Hong Kong, each with the local risk that actually drives it.