Wall Street Journal

Wall Street Journal
“Foreign Exchange goes wild”
Tom Lauricella
March 1, 2011
Summary
In his article “Foreign Exchange goes Wild,” Lauricella, argues that the market is now unpredictable more than ever before. Prior to the 2008 financial crisis, investors expected the Forex market to be a safe bet from huge losses as there were minimal risks in the market. One of the reasons for this optimism was the belief in the role of the Euro in the exchange market, with the rise in use of the euro offering hope of stability in the foreign exchange markets. Furthermore, many emerging markets improved their economic policies and there was little doubt on their ability to facilitate stable foreign exchange fundamentals. However, the 2008 down turn showed that investor’s hope was misplaced.
Central issues
Even though, the global financial crisis began in the USA, the impact of the crisis affected the Euro and Europe in general. There have been changing fortunes in Europe both politically and economically, leading to increased volatility of the euro. One of the contentious issues is how to help struggling economies in Europe. Equally, there are disagreements on the efforts of central banks in slowing down the rise in the value of currencies. In contrast, there were fears that the Federal Reserve in America considered the option of devaluing the dollar.
With uncertainty on the economic conditions of many countries, there is increased risk, which poses enormous challenges on foreign exchange traders, and those who intended to deal in foreign currencies. In essence, it is more difficult creates effective investment strategies that seek to minimize losses. Foreign exchange affects dealings in foreign bonds, stocks, investments in foreign countries or simply arrangement of foreign trips. The risk implications of currencies nowadays force currency dealers to adapt to minimize risk in a financial and economic world where there are many uncertainties. Currencies act as sovereign assets, to the extent that the financial crisis which began in the sup prime mortgage market affected banks, private lending to public sector debt and currencies in general.
The volatility of the foreign exchange market is potentially profitable to many investors. Thus, there has been a marked increased in trade in foreign currencies. The Japanese Yen one of the major currency is an example of a currency that has shown his trend against the US dollar. However, currency risk come from both developed and the emerging countries. The major central banks of the world have resulted to extreme monetary policy measures. In the US, the Federal Reserve uses quantitative easing through increased money supply in the economy after buying bonds. Europe prefers use of higher interest rates, but there is increased speculation that other central banks might also adopt quantitative easing.
Relation to Class
The article relates to the chapter on “International fi...