Currencies fluctuate based on interest rates, inflation, and economic strength. A stronger dollar hurts US multinationals (their overseas earnings convert to fewer dollars). Forex is the world's largest financial market.
Answer: US multinationals earning revenue abroad. A strong dollar makes US exports expensive and reduces the USD value of overseas profits — hurting multinationals.
Answer: Relative interest rates, inflation differentials, and economic strength. Higher interest rates attract capital inflows (seeking better returns), strengthening the currency.
Answer: Borrowing in a low-rate currency to invest in a higher-rate currency. Carry trades exploit interest rate differentials — borrow cheap (yen, franc) to invest in high-yielders (emerging markets).
Answer: Exchange rates should reflect relative price levels between countries. PPP says a basket of goods should cost the same in different currencies once exchange rates are factored in.
Practice this with $10,000 in virtual cash in Tradecraft, free paper trading with real market data.
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