What Happens to Currencies
If the Stock Market Falls 10%? - Forex Market
Friday, 03 June 2005 GMT - Source
FXCM
Under normal economic conditions
strong stick markets lead to strong currencies as foreign
investors bid up the base currency in order to participate
in equity gains. Certainly this maxim held true throughout
the late 1990's as both US stocks and US dollar rallied
strongly. Most recently, however, the relationship changed
dramatically. Note how US stocks rallied as USD became
weaker and declined when USD gained value. Why would
this occur? One possible reason is that in the past
decade US corporations have become far more global in
their business dealings.
Companies such as Intel, Microsoft, and McDonalds derive
a significant (in some cases a majority) portion of
their revenues from abroad. If their cost of goods is
denominated in dollars while their revenues are generated
in euros and yen, then as the dollar declines, the potential
for strong profits is enormous. Therefore, although
conventional thinking may dictate that the dollar will
drop if stock market falls 10%, the opposite may in
fact occur.
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