Volatility, or the tendency for fluctuation that can affect your earnings within the stock market, is typical within a
domestic market but even more evident and much stronger on the Foreign Exchange Market. What factors affect the
value of currency on Forex, and is there any way to control
this?
Devaluation And Revaluation
As mentioned devaluation refers to the purposeful decline in value of a currency in relation to other currencies as charged by a government entity. For example, if the U. S. dollar is worth ten units of a foreign
currency that is then devalued by ten percent, the U. S. dollar is now equivalent to only nine units of the foreign
currency. This makes any items purchased in the foreign currency more expensive for those trading in U. S. dollars,
as the exchange rate is lowered. It also makes items in the foreign country less expensive to trade in U. S. dollars.
An opposite change in value can also occur, raising the value of the foreign currency. This is referred to as revaluation.
While it may seem that purposely adjusting the value of a nation’s currency is “cheating”, or taking an unfair
advantage by making foreign products cheaper to purchase and increasing the value of exports, there are regulations in place to prevent the manipulation of exchange rates for such purposes. The charter of the IMF (International Monetary Fund) assists in prohibiting such occurrences and enforcing the policy.
There are ways in which you can take advantage of devaluation and revaluation, which will be discussed later
on. However, what happens when the value of a foreign currency changes due to market fluctuation rather than
purposeful reductions or increases by a federal government or federal bank? What effect do appreciation and
depreciation have on the stock market?
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