How does Oil & Gold price affect Currency exchange rate?

Will Indian Rupee continue to be strong in near future?How does Oil %26amp; Gold price affect Currency exchange rate?
If you鈥檙e trading currencies, there鈥檚 one very good reason. Many of the most important currency trading pairs rise and fall on the price of a barrel of oil. The price of oil has been a leading indicator of the world economy for decades, and experts predict that that won鈥檛 be changing any time soon. The connection between the price of oil and the economy of many countries is based on a couple of simple facts:





1. Countries with healthy supplies of crude oil benefit economy-wise from higher oil prices.





2. Countries who depend on imports for their energy needs benefit from lower oil prices and lose when oil prices rise.





3. When the economy of a country is strong, its currency is also strong in the forex market.





4. When the economy in a country takes a downturn, its currency loses value in the currency exchange rate.





The fluctuating oil prices of the past year 鈥?2005 鈥?are a good example of what can happen when factors affect the price and supply of oil. Remember from basic economy courses that higher oil prices act to put the brakes on consumer spending. This will be true as long as the major source of oil for industrialized countries is petroleum based. The price of all goods produced hinges on the price of a barrel of oil. If the oil prices rise, so do production and supply prices for most consumer goods. In addition, the expenses of individual consumers rise as they pay more to fuel their automobiles and heat their homes. The net result is a downward swing in the economy of the country until it hits a rallying point that starts it back on an upward trend.





Experts who watch the oil market are split on which way oil prices are headed, and just how far. A little over a year ago, most pundits agreed that $40 a barrel was the upper limit for a barrel of crude oil. At the year鈥檚 beginning, oil had already broken that point, and was selling at $42.50 a barrel. The vagaries of the weather, world politics and actual capacity to meet demands have fueled one of the most volatile pricing years in recent memory. At one point, the price of crude broke $70 a barrel, an increase of 65% over the beginning of the year. And while prices dropped for a short period, at the end of the year, they were still 45% higher than at the beginning of the year. Since the turn of the year, prices have begun their climb again, and the majority of traders believe that we won鈥檛 see a reversal of that trend in the near future. The conservative predict a price of $80 per barrel. The more aggressive are calling it at $100.





What will this mean for the currency trading market?





In the currency market, exchange rates are often predicated on the health of a country鈥檚 economy. If the economy is robust and growing, the exchange rates for their currency reflect that in higher value. If the economy is faltering, the exchange rate for their currency against most other currencies also stumbles. Knowing that, the following makes sense:





1. The currency of countries that produce and export oil will rise in value.





2. The currency of countries that import most of their oil and depend on it for their exports will drop in relative value.





3. The most profitable trades will involve a country that exports oil vs. a country that depends on oil.





Based on those three points, the experts are keeping their eye on the CADJPY pairing for the most profitable trades, and here鈥檚 why.





Canada has been climbing on the list of the world鈥檚 oil producers for years, and is currently the ninth largest exporter of oil worldwide. Since the year 2000, Canada has been the largest supplier of oil to the U.S., and has been getting considerable attention from the Chinese market. It鈥檚 predicted that by 2010, China鈥檚 import needs for oil will double, and match that of the U.S. by 2030. Currently, Canada is positioned to be the largest exporter of oil to China. This puts Canada鈥檚 dollar in an excellent position from a trading perspective.





Japan, on the other hand, imports 99% of its oil. Their reliance on oil imports makes their economy especially sensitive to oil price fluctuations. If oil prices continue to rise, the price of Japanese exports will be forced to rise as well, weakening their position in the world market. Over the past year, there has been a close correlation with rises in oil prices and drops in the value of the yen.








Forex Definitions, Terms and Acronyms:





* Nominal exchange rate - the rate at which an organization can trade the currency of one country for the currency of another.


* Currency pair example 2 - if the quote moves from EUR/USD 1.2500 to EUR/USD 1.2510, the Euro is getting stronger and the dollar weaker.


* Stock exchange - a corporation or mutual organization which provides the facilities for stock brokers to trade company stocks and other securities.











If economy and history are to be heeded, the oil prices can鈥檛 continue to rise indefinitely. Eventually, consumers will bite the bullet and start cutting their demand for oil and gas. When that happens, the price of oil will either stabilize, or start heading back down toward the $40 a gallon that experts predicted it would never hit.





1) Look at how dependent a particular country is on oil





* A country鈥檚 dependency is very important in determining how its currency will be impacted by a change in oil prices.


* Intensive energy users (or net oil importers) will be more negatively impacted than other countries. Falling oil prices benefit consumers in the same way as tax cut, while higher oil prices act like a tax hike.


* For corporations, higher oil prices can translate into lower profits. Countries with alternative fuel sources, and other resources have the ability to switch from strict oil dependence to other energy sources, which helps to reduce their exposure and sensitivity.





2) Monetary Policy Responses





* How reactive a country鈥檚 monetary policy authorities are to rising inflation is also very important in forecasting a currency鈥檚 reaction.


* Countries with inflation targets may be more aggressive at combating inflation and will adjust their monetary policies accordingly, while others who may be dealing with low inflation will keep monetary policy accommodative to guard against slower growth as a result of higher oil prices.


* Monetary policy and interest rates are key drivers of currency movements.





3) Does the economy have a large oil-related market cap vs. industrial market cap





* Market cap composition may also influence how the oil price affects a currency via capital flows.


* The currencies of countries with a low energy-related market cap, but a high industrial market cap is more likely to be hurt by higher oil prices.


* Investment flows may be muted by the decreased profitability of these types of industries.


* Countries with heavy manufacturing and high levels of oil imports will most likely have the most exposure.


* As you see, the key factors to look at are GROWTH and INFLATION


* However, inflation isn鈥檛 only driven by high oil prices. In the US, higher prices for everything from chemicals and food to industrial commodities and labor are hitting the US economy hard. As the US economy sputters trying to gain momentum, employers are faced with more and more obstacles.


* So with the threat of inflation looming it鈥檚 important to consider the monetary policy reactions of the global central banks.








A) Which Currencies Will Most Likely Be Negatively Impacted By Higher Oil Prices?





* In my opinion, its the US dollar and Japanese yen





Lets look at our framework to determine why





1. Dependency on oil


* The US and Japan are the world鈥檚 two largest net oil importers.


* Skyrocketing oil prices will have a particularly damaging effect on the economic recoveries in both countries by effectively threatening to stall growth.


* Fed Chairman Alan Greenspan has already warned that rising oil and gas prices could have a significant impact on the long-term development of the US economy.


* In the case of Japan, their lack of domestic sources of energy and their need to import vast amounts of crude oil, natural gas, and other energy resources makes them particularly sensitive to changes in oil prices.


* Japan also lacks the flexibility to switch to nuclear power because they are a huge net importer of uranium for their nuclear power plants.





2. Monetary Policy


* Aside from their high reliance on external oil, the Federal Reserve and the Bank of Japan are also more likely to focus on growth rather than inflation.


* Both countries have been grappling with very low levels on inflation and even what may be considered deflationary conditions.





B) Which Currencies Will Most Likely Benefit From Higher Oil Prices?





* In my opinion - The British Pound and the Euro





1. Dependency on oil


* The United Kingdom is a net oil exporter and stands to benefit from rising oil prices. Although their oil exports are relatively small, they are not subject to the same net ramifications as oil importers such as the US or Japan.


* On the other hand, Germany and France, the two largest countries in the Eurozone are net oil importers.


* Germany's crude oil imports, especially from Iran have been climbing drastically since the year 2000. Another Eurozone country that may suffer from higher oil prices is Italy.


* Almost 60% of Italy's energy comes from oil, most of which is imported. Gas accounts for another 30% of energy use.


2. monetary policy


* More importantly though are the forecasted monetary policy reactions of the Bank of England and the European central bank.


* Both monetary policy authorities are particularly concerned with rising inflation.





And most importantly which currency pairs that will benefit the most?





1. GBP/JPY


2. EUR/JPY


3. EUR/USD


4. GBP/USD











Hope this information helps u...


i wish u good luck....


Happy investing...!!!!!How does Oil %26amp; Gold price affect Currency exchange rate?
currency value depends upon their deposit of dollor and gold. in world bank and nationl bank of particular country. when price of gold increase. the value of gold reserve increase. when price of oil increase they have to spend more dollor /gold for oil, by the way it affect currency exchang rate. when dollor has depreciated , rupees exchange rate will increase.


indian rupee should maintain its vulnerability against dollor