The Forex Market and Oil Prices

Success in the foreign exchange market can only be attained if one is to take into consideration all the forces that influence the behavior of the currency market. As such, every forex traders should take heed of oil and its immense influence over the foreign exchange market as a whole.

The price of oil has always been a vital gauge of the world's economy not only because the modern world is heavily reliant upon petroleum but also because the level of oil prices affect the performance of major financial markets such as the forex.

So where does this connection between oil prices and the forex market stem?

Basically, oil affects the currency market because countries that have vast reserves of oil will benefit from increasing oil prices resulting in the economy of those particular countries to grow and flourish which will cause the currencies of those economies to strengthen and increase in value, affecting the exchange rate of currencies in the forex market to alter in accordance with the changes.

The effect on countries with no oil reserves will be exactly the opposite however. Such countries will suffer from rising oil prices which will weaken their economy resulting in their currency to weaken as well in the foreign exchange market.

Apart from the issue of oil reserves, oil prices still greatly influence the economy of countries whether they have enormous amounts of oil or not. This is because virtually every goods and services in the world market utilizes oil directly or indirectly, making their production costs rise in the event that oil price increases. With the costs of good and services increasing, there will be less spending among the people which will result in less commerce which will push the economy forward.

With the economy becoming sluggish, the weakening of the currency will follow which will affect the exchange rates in the forex market.

This influential role of oil prices over the foreign exchange market has made winners and losers among the different currencies in the forex.

Take for instance the Canadian dollar. The Canadian dollar seems to be not as influential as other currencies such as the US dollar and the Japanese but since Canada is the main supplier of oil to the United States and China, this status of the Canadian dollar is bound to change with the rising oil prices which will energize the Canadian economy and put the Canadian dollar at the forefront of currencies in the forex.

There are many factors that influence the behavior of the foreign exchange market but none can claim to be as influential as oil prices whose even the slightest movements are certain to rock the currency and the foreign exchange market as a whole.

 

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