The Hindu Business Line : Money talks, indeed

John, quite exasperated, said. "Now, son, I don't have time. I travel everyday around the world to provide you with everything and you scribble a currency trader's name?"

"He is considered the guru of `currency trading'," declared Adam. "He has actually made investors aware of currency trading. In fact, he made more than one billion dollars by shorting pounds in 1992."

`Strong' and `Weak'

The doctor said, "I often hear the terms `strong' and `weak' in foreign exchange or currency trading market. I think a currency is always measured against another currency and is said to be stronger when its value rises or weaker when its value falls. Right, Adam?"

"Yes," said Adam. "On an average, $2 trillion worth of currency is traded every day. Even Warren Buffett, an equities trader, made $151 million in 2005, by betting that the US dollar would weaken.

"Actually the dollar fell to a one-year low against the euro, the pound and the Swiss franc — also a seven-month low against the yen."

The doctor remarked, "Looks like it is practically possible to make millions and billions in currency trading."

"Of course," responded Adam. "The beauty is it can be done anytime of the day. Say, you are working full time and want to make extra money, then currency trading is one of the best options. Unlike equity trading, you don't have to wait for months or even years to reap the benefits. If you learn to bet whether the currency would fall or rise, you can make money even in a few hours.

"Currency is traded completely in cyber space through large financial institutions, international banks and forex markets. Foreign exchange is operated in cyber space using telephones and computers, and doesn't depend on the individual trading floor. It operates 24 hours a day. Also, unlike commodities or stock markets, there is no central place for currency trading or for that matter there is no trading floor."

Adam caught his breath. He then looked at his dad and concluded wryly, "Most importantly, you don't have to be away on business trips and be a stranger to your family."

Adam's father was touched to the quick. The doctor eased the tension by suggesting that the father and son spend some time alone.

As both of them strolled across a nearby park, John asked, "Son, how come you are interested in this topic?"

Adam became loquacious, "When you go to a particular country I see whether the US dollar is getting stronger or weaker than that country's currency. When you made a trip to India, I found that one dollar could buy Rs 40. As of now one dollar can buy Rs 45. If a shirt costs Rs 120, then a consumer who had paid $3 last week could buy the same shirt for $2.66.

"Imagine these types of purchases by millions of consumers — their purchasing power increases as they tend to spend the same amount and buy more things, thereby giving the economy a boost."

John was glad his son had opened up. "When the US dollar gets stronger, the US consumers benefit. However, a stronger dollar has its flip side too. Even though stronger dollar helps local consumers, it hurts US exporters."

"Are you sure?" Adam asked with a quizzical look.

John said with a twinkle, "I read somewhere that, `By the time a man realises that maybe his father was right, he usually has a son who thinks he's wrong'."

They both laughed together for the first time in years.

John continued. "Let me explain. Dollar getting stronger against the world currency has both pros and cons. Say, General Electric (GE), a regular exporter of medical equipment, agreed to export for $1,000 per equipment. If Indian rupee was valued at Rs 40, then the local hospital had to pay only Rs 40,000 per equipment. However, when the dollar gets stronger to Rs 45, then the same equipment would cost Rs 45,000 for the local hospital. Thus, stronger dollar poses risks to the exporters whereas it helps the American consumers.

John said, "The flip side is a weaker US dollar which is true in today's currency market. Today, the US dollar can buy only Rs 44.85. However, during December 2005, one dollar could buy Rs 46.10. Likewise, the dollar has weakened against the yen, and pound.

"When the dollar gets weaker, the biggest advantage is for US exporters as they can easily compete and their goods would be available a lot cheaper in other countries. However, the consumers and exporters to US would find it expensive as the currency gets weaker."

Adam said, "Isn't it interesting that currency is traded like a commodity?"

"Yes," John said. "Do you know the foreign exchange market is not regulated unlike equities market? In fact, the price of a currency is purely determined by supply and demand. I am going to make a call to our doctor. Meanwhile, think about why one country's currency is in higher demand or losing its demand?"

The interest angle

The doctor was happy to hear about the developments and thought to himself that a common topic was a sure-fire way of breaking the ice.

A once-taciturn Adam was bursting to speak, "Dad, There are many reasons, and an important one is that when a country's central bank raises interest, then the local currency earns higher interest. Say, if the central bank of Japan lowers interest rate and US Federal Reserve raises interest, then an investor gets more returns for his investments from the US than Japan. Thus, the value of a dollar gets stronger against yen. In addition, if a country has trade surplus, then the country is considered a strong exporter and thus helps the currency to be valued higher."

"Right," said John. "However, a currency depreciates not only when the interest rates are lower but also when a country's financial condition is weaker. Even political unrest can dampen investor's interest in the country and thus would weaken the currency."

Adam asked enthusiastically, "Dad, this weekend, why don't we check out the Web sites for currency trading, like www.forex.com, www.fxcm.com and www.mgforex.com?"

Realising his dad might take off on another business trip, his enthusiasm deflated in a second, "But where are you headed next, dad?"

John put an arm around his son and said, "Nowhere. I'm going to be right here. East or west, home is best, son."

The authors are publishers of www.wisepen.com

Racy@TheHindu.co.in

More Stories on : Forex | Financial Markets | Racy Cases

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Money talks, indeed

Service tax on CAs' services

Sticklish Issues

`Tackle the small to solve the big'

What after standard X?

Financial illiteracy among investors?

Bring back LTCG?

Just Do It

Withholding nitty-gritties for the employer

Tax on income from inheritance

A not-so-taxing exercise

Cancer is not a form of death

Engage people with your `attitude enthusiasm, and excitement'